The 2012 drought’s impact on grocery prices compared to the 1988 drought

In the summer of 2012, the United States experienced its worst drought since the 1980s. According to the National Oceanic and Atmospheric Administration’s National Weather Service, the 2012 drought was similar to the 1988 drought, but was more widespread, affecting more states. Should the 2012 drought have a bigger impact on grocery prices than the 1988 drought?

The June 1988 drought resulted in Producer Price Index (PPI) increases of 21.3 percent for wheat, 26.0 percent for corn, and 22.5 percent for soybeans. The PPI for processed foods and feeds increased 2.1 percent in June, and in July, the Consumer Price Index (CPI) for food at home increased 1.3 percent—the largest monthly advances for both indexes that year. Chart 1 shows how the drought in 1988 immediately caused a spike in prices for these major crops, and subsequently how much more consumers paid for food.

These are interactive charts. Mouse over to see data labels. Click the legend items to hide and show data displayed

 

In July 2012, drought again caused a spike in the PPI for wheat (20.2 percent), corn (20.5 percent), and soybeans (13.0 percent). In August 2012, the processed foods and feeds index increased 1.1 percent—the largest rise since August 2011. In contrast, the CPI food at home index advanced only 0.2 percent, compared with the 1.3−percent increase that occurred in July 1988.

 

Though the 2012 drought appears more widespread than the 1988 drought, price movements in the indexes for PPI processed foods and feeds and for CPI food at home were not as volatile as they were in 1988. In 1988, processed foods and feeds prices increased immediately with the onset of the drought, but in 2012, there was a 1-month lag. In addition, prices for processed foods and feeds increased 2.1 percent from May 1988 to June 1988, compared with a 1.1-percent rise in prices from July 2012 to August 2012.

In 2012, consumers seem to be protected from extremely high prices because the farming sector is better equipped to withstand drought conditions. Agricultural productivity increased 50 percent between 1982 and 2012; from 1988 to 2012, farm income grew 147 percent, and crop insurance participation was up 60 percent. These factors have made farmers more resilient during times of drought and have reduced the amount of price inflation that a drought may cause.

The 12-month percent changes were less extreme in 2012 than in 1988 because in 2012 the economy was experiencing very high commodity price levels just prior to the drought. Chart 3 shows that the historical average increase in consumer food prices was 3.0 percent between 2004 and 2011.

 

Although the summer 2012 drought was the worst since 1988, food price inflation had been relatively robust in the years leading up to 2012. As a result, grocery bills are forecast to be in line with average historical food price inflation. So, although there may have been more dry land and hardships for many farmers, consumers should not notice as severe an impact in their grocery bills as during the 1988 drought.

These data come from the Producer Price Index program. To learn more, see "Will the 2012 drought have a bigger impact on grocery prices than the 1988 drought?" (HTML) (PDF), in Beyond the Numbers, volume 1, number 18, November 2012.