California Drought 2014: Food Prices and Consumers
The impact of the drought on food prices depends on its severity, the impact it has on production, and the acreage and planting decisions of California farmers. With respect to fruits and vegetables, the immediate concern is the cost and availability of groundwater to supply the crops. Owing to higher production costs, insufficient water, or both, producers may opt to reduce total acreage, driving up prices not just this year but for years to come. At this point, it is too soon to discuss the extent to which this is likely to happen throughout California.
Retail fruit and vegetables share a much stronger relationship with farm commodity prices than many other foods do. This, as well as seasonality, helps to explain why the fresh fruit and fresh vegetable Consumer Price Indexes (CPIs) are among the most volatile that ERS analyzes and forecasts. Fresh produce undergoes relatively little processing, packaging, and advertising. It is also highly perishable, meaning that storage has little-to-no impact on price transmission. As a result, increases in fruit and vegetable farm prices should show up on supermarket shelves—and in the CPI—within approximately 1 month. However, even for fresh produce, the percentage increase in the CPI will be considerably smaller than for prices of commodities like wheat and corn. Fuel prices, labor wages, agribusiness contracting, imports, and other factors all serve to mitigate farm price impacts in supermarkets on a national level. Owing to transportation costs, any retail price increases resulting from the drought will likely increase slightly with distance from the shipping point in California.
California is also a major dairy-producing State. The drought has the potential to increase the price and decrease the availability of alfalfa, the primary feed for dairy cattle, which could drive up fluid milk prices. Increases in the farm price of fluid milk are typically transmitted quickly and efficiently to retail food prices. In fact, fluid milk was seen as one barometer of the magnitude and duration of the impacts of the 2012 drought due to its perishability and strong dependence on commodities used as animal feed. Impacts on other products in the dairy category, including sour cream, cheese, or ice cream, will be delayed significantly following impacts on the agricultural sector and will be smaller in percentage terms.
In June ERS revised its 2014 forecast for fresh fruit and vegetable inflation upward to 3.0 to 4.0 percent. The recent increase in the retail prices for fresh fruits and vegetables was primarily driven by an increase in the price for citrus fruit. However, rising citrus prices are reflective of two factors unrelated to the California drought. The first is the ongoing greening disease of Florida citrus commodities, which has damaged or destroyed substantial portions of this year’s orange crop. The second is the freeze of December 2013 in southern California that reduced the U.S. fresh orange crop. Fresh vegetable prices have experienced moderate inflation in the first half of 2014. From June to July, fresh vegetable prices decreased 0.8 percent. The price decrease for fresh produce in July was primarily the result of seasonality. The summer months bring warmer weather throughout the country, which increases the likelihood that more fruits and vegetables will be purchased and consumed from nearby locations. Locally sourced foods are often less expensive due to lower transportation costs. Overall, the California drought has not yet had a discernible impact on national prices for fruit or vegetables.
The current outlook for 2014 is for normal food price inflation, with supermarket prices expected to rise 2.5 to 3.5 percent over 2013 levels. Combined with increased pressure on the cattle and wholesale beef markets following the unusually cold weather at the end of 2013 and the ongoing drought conditions in Texas and Oklahoma, major impacts from the drought in California have the potential to result in food price inflation above the 20 year historical average of 2.8 percent. For more information, see the Food Price Outlook.