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Piershale: Farmers aren't the only ones affected by drought

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The worst Midwest drought since 1988 baked farms from Arkansas to Ohio and threatened corn output during the summer of 2012. The price of the grain used in food for people and livestock is surging at a time when retail meat costs are at near record highs.

“The most serious consequence of the increasing heat… has not been the temperatures. It has been the evaporation rate. Much of the U.S. was left drought stricken by almost two years of La Nina conditions,” said climatologist Evelyn Browning-Garriss, author of BrowningNewsletter.com.

Ernie Goss, a professor of economics at Creighton University in Omaha, warns that the drought will have regional, national, and even international consequences. “Farm income, which has underpinned the growth of many rural states, will be under ‘significant’ downward pressure,” he said.

In June 2012, farmers were expecting record yields. They will suffer even though federal crop insurance programs will prevent the dust bowl bankruptcies and farm repossessions that John Steinbeck wrote about in his 1939 classic, "The Grapes of Wrath." This year, insurers will see “the largest claim they’ve probably ever had,” predicts John Cory, chief executive officer of Prairie Mills Products LLC, a grain processor in Rochester, Ind.

In the past decade, the average price of food, as measured by the United Nations, has tripled. While spending on food as a percentage of income in the U.S. may still be less than 10 percent, more vulnerable countries are suffering. Egyptians, for example, spend 40 percent of their income on food.

Jeremy Grantham, the founder of the GMO investment management fund, says food is a big worry, especially the meat habit acquired by the world’s exploding middle class. One pound of dressed beef displaces 30 pounds of grain, he said. Grain productivity may be reaching a point where the big wheat and rice producers have not made any progress for more than 10 years.

While we often hear “There is no inflation,” consumers already have experienced food price inflation in recent years. Inflation is insidious because it usually incurs incrementally and is sometimes disguised by food retailers who reduce the weight of items, but not the price. Inflation also compounds because the 10 percent price increase paid today is a bigger cash outlay than a 10 percent price increase a year or two ago. Restaurant chains will face higher costs, but less so for the multi-national companies such as McDonald's and Yum! Brands, which can source produce locally in the many different countries where they operate.

However, households will be most affected in the months and possibly years ahead as the prices for most everyday foods – from bakery products to soups, and especially meat and chicken – increase.

Browning-Garriss says that the U.S. – which ended the La Nina cycle with 56 percent of the lower 48 states with dry or drought conditions – is now 72 percent dry. Even more serious are the dried out areas as they are the most productive agricultural lands in the nation.

• Mike Piershale, ChFC, is president of Piershale Financial Group. Send financial questions you wish to have answered in this column to Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You also may fax them at 815-455-6895 or email Mike.Piershale@PiershaleFinancial.com.

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