Extreme weather could push food prices even higher

By Alicia Wallace, CNN Business

(CNN) - Weather has long been a fickle farmhand, devastating fields one year while delivering bountiful harvests the next.

But as extreme weather events increase in frequency or become even more intense, the unpredictability is becoming more of an economic liability.

As the United States continues to battle high inflation, the effects of prolonged droughts and extreme weather events could help keep the heat on prices for a long time to come.

The Consumer Price Index, which measures price changes for a basket of goods and services, showed inflation hit 8.3% in August from the year before. But food prices rose at an even faster pace, increasing by 11.4% during that period, according to the Bureau of Labor Statistics.

Scorching heat and drought continue to bear down on the American West, forcing farmers in vital agriculture-producing states to fallow land, pull up orchards, reduce livestock herds, and slash expected yields.

"The prolonged droughts that we're seeing [present] some increased risk that inflation remains higher for a longer time," said Charlie Dougherty, a Wells Fargo economist who recently co-authored a status report on the economic state of American agriculture.

The high heat and drought have only compounded the issues facing American farmers, including supply chain ripple effects from Russia's war against Ukraine that have caused inputs such as fertilizer to surge in price; nationwide worker shortages; and inflation and high energy prices, the economists noted.

"When you've put all that together, farmers and ranchers have experienced extraordinary cost pressures," Dougherty said. "And those higher costs are being passed on to consumers." The rise in food prices is one of the key factors fueling inflation, according to recent CPI data.

The overwhelming majority of fruits, tree nuts and vegetables are sourced from drought-stricken states such as California and Texas, the American Farm Bureau Federation noted in a recent market update.

The drought and its effects "will likely result in American consumers paying more for these goods and either partially relying on foreign supplies or shrinking the diversity of items they buy at the store," according to the Farm Bureau. "Drought conditions in the US also risk global access to some items like almonds, since California produces 80% of the world's supply."

While the majority of those specialty crops are holding up, one of the hardest-hit crops in California has been rice, according to Aaron Smith, UC Davis' DeLoach professor of agricultural economics.

Rice acres have dropped by 55% this year, Smith said, noting US Department of Agriculture data showing an increase in prevented-planting acres, or land intended for a crop but prevented by natural disaster or inadequate water.

California, which is second to Arkansas in rice production among US states, generates about $900 million of rice annually, he said. California is a key producer and exporter of medium-grain rice, found in sushi and risotto dishes. While the acreage drop represents a big hit to US rice production, the effects could be mitigated by other sources, he said.

"If you look in a global perspective, which is what drives the price of rice, California is not a very big producer relative to the whole world," Smith said. "The local impact is very big; the global impact and the consumer impact for now — not so big."

The globalized economy and trade serve as a buffer to an extent, said Josué Medellín-Azuara, an associate professor of environmental engineering at UC Merced who studies climate change adaption and the economics of agricultural, environmental and urban water uses.

"I don't think we're in a situation of food insecurity at this point, but it's really just a reminder that warmer temperatures can bring some more challenges to produce many of the agricultural commodities we traditionally see," he said. "There's a recognition that the groundwater reserves won't always be there to help us weather future droughts, if we don't use those more sustainably."

Weather whiplash

In far western Minnesota, a few miles from the South Dakota border, Anne Schwagerl and her family run a 400-acre organic farm.

Last year, Schwagerl and other farmers across the North Star State endured the worst drought seen in decades. Some of the yields were halved on her family's farm, where they grow crops such as corn, soy beans, oats and rye.

This year brought the rain. By mid-June, about 75% of the state saw above-average levels of precipitation, according to the Minnesota Department of Natural Resources.

"We had a really challenging fall harvest and then a wet winter, which was great," Schwagerl said. "We needed that rain, but then it kept coming, and we had a very wet late spring. So it was this whiplash feeling of knowing that this could change [at] the drop of a hat."

And in the past couple of years, the intensity of those weather events has only increased and relatively infrequent weather phenomena like derechos — long-lasting and high-powered wind storms that can crush grain bins like they were soda cans — have joined the vernacular, she said.

"2019 was a historically wet year. All throughout the year, we couldn't miss a rain for love or money," she said. "2020 was Covid, our first Covid year, where everything was locked down. And then 2021, we went through a once-in-a-generation drought."

"It feels like you can't use those words like 'once-in-a-generation' anymore because they keep happening. Does that still have meaning?" she added.

Schwagerl is feeling uneasy about what 2023 might bring in terms of input costs, commodity prices and weather.

"We're riding along on this endless roller coaster at the same time as everyone else," she said.

Compounding factors

Ariel Ortiz-Bobea, an applied economist at Cornell University working on agricultural and resources economics, is optimistic about the private and public sector investing in research and development and other mechanisms to improve productivity and conserve resources. He expressed concern about lesser-developed countries and the effect of global events such as the war in Ukraine.

"If things get more politically hairy, those [drought] events become more painful," he said.

Extreme weather also can negatively affect companies' bottom lines, according to research from Paul Griffin, professor of management at UC Davis.

Griffin's research of heat effect found that every degree over 77 degrees Fahrenheit (25 degrees Celsius) translates into an annualized loss of sales of 0.63% and a profit margin decrease of 0.16%. Stock prices dropped by an average of 22 basis points in response to a heat spell, Griffin found.

"The implication there is that if sales are decreasing, then firms will have an incentive to raise prices," he said.

The exact extent to which extreme heat, drought and, more broadly, climate change will play a role in prices and inflation is extremely difficult to estimate, Smith said.

There are far more costs baked in to the price of a product than what consumers pay at the grocery store — including wages, materials, production, processing, transportation, distribution, retailing, and marketing, he said. Farmers and ranches receive an estimated 8 cents from every dollar spent on food at home and away from home, according to the Farm Bureau.

"All those costs are much bigger pieces of the food pie than the actual value of the food that's produced by the farmer," he said. "So when we're looking at food prices and worrying about things that might increase food prices, we probably should be paying more attention to those costs of processing and transportation and marketing rather than what's happening on the farm."

Russia's war in Ukraine helped fuel a sharp rise in oil prices, which filtered down through key inputs such as fuel and fertilizer; and it complicated already tangled supply chains, further raising costs for all the businesses that help bring farm products to the table.

Still, the very prospect of more extreme weather could further sap away groundwater and limit the cultivation potential in the future, Smith said.

"That's probably going to mean, as we look forward, fewer acres of the different fruits and vegetables that are grown in California and that people around the country eat," he said. "So that, inevitably, in the long run will raise prices — maybe not this year, but they will go up."

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