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, retail inflation is considerably smaller than the inflation seen at the farm level for the same fruits and vegetables. Commodity price swings have a muted effect at the retail level as may other factors make up the price consumers pay at the supermarket. Retail prices are also affected by fuel prices, labor wages, agribusiness contracting, imports, and other factors of production. Owing to transportation costs, any retail price increases resulting from the drought will likely increase slightly with distance from the shipping point in California.
Droughts in California are generally associated with higher retail prices for produce but the effects do not occur immediately. Price increases associated with a drought are lagged due to the time it takes for weather conditions and planting decisions to alter crop production. For example, a head of lettuce takes roughly 2.5 to 3 months to reach maturity. In 2005, following five years of drought, retail fruit prices rose 3.7 percent and retail vegetable prices increased 4 percent. Prices continued to rise in 2006, one year after drought conditions began to improve. However, it is important to keep in mind that many factors affect retail produce prices. Despite drought conditions, prices for fresh produce fell in 2009, as the 2007-09 recession reduced foreign and domestic demand for many retail food products.
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. However, from July to August, fresh vegetable prices decreased 1.6 percent. The price decrease for fresh produce 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 25 year historical average of 2.8 percent. For more information, see the Food Price Outlook.