The United States is experiencing a drought of historic proportions, and despite recent precipitation brought on by Hurricane Issac's landfall, there is no end in sight. The current drought has far-reaching implications, many of which are yet to be felt by U.S. consumers and businesses.
The U.S. Department of Agriculture reported that 52% of the nation's corn crop was in "Very Poor" or "Poor" condition for the week ended September 9th. Compared to the same time a year ago, when just 20% of the nation's corn crop was listed in similar condition, the USDA forecasts that the 2012/13 corn yield will be the lowest since 1995/96. The situation is somewhat better for soybeans, with 36% of the nation's soybean crop listed in "Very Poor" or "Poor" condition, as compared to 17% a year ago.
These unfavorable conditions, coupled with perpetual increases in demand and decreasing inventories, caused corn and soybean prices to reach record highs this summer on the Chicago Board of Trade.
The increased price of corn is especially of concern given its importance in animal feed and the gasoline additive, ethanol. Many animal-based food products, including meat, dairy, and eggs, will likely see the greatest price increases for this reason. And, as these are staples of the American diet, price increases at the grocery store are likely to put further pressure on household budgets. Ethanol, which represents 40% of U.S. corn production, comprises approximately 10% of U.S. gasoline. Thus, as ethanol increases in price, gasoline increases in price, especially in those states with ethanol mandates such as Missouri.
Consumers, already rallying from the Great Recession and continued economic malaise, haven't yet found stable enough footing to fully absorb increased food and fuel prices. It is likely, therefore, that food producers – especially those producing food items containing corn and soy derivatives – will absorb some of the increases in input prices. Despite these concessions, it is expected that consumer discretionary spending will be impacted by higher food and fuel prices in the months to come.
Along these lines, retail businesses are likely to be impacted by the drought as consumers are left with less disposable income. Consumer spending is a significant driver of the U.S. economy, accounting for 70% of economic activity. According to Gallup's Daily U.S. Consumer Spending poll, consumers' daily spending is down from its recent high of $84, reached in August, to $68, its lowest point since late July. Similarly, Gallup's Economic Confidence Index poll indicates that consumer confidence is at its lowest point since January.
Clearly, decreases in consumer spending will negatively impact the economy at large – but further decreases on part of higher food and fuel costs may cause further deterioration in the current economic recovery. It remains to be seen what improvement, if any, may be reported in the economy in the coming weeks. One thing is certain, though: the current drought will only serve to dampen any pick-up in U.S. economic activity.
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