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What the 2012 Drought Means for Your Pocketbook

Updated on August 19, 2012

The Drought's Impact on Food and Gasoline Prices

To paraphrase Ned Stark, "higher food and gas prices are coming," a direct result of the drought that has impacted much of the nation's breadbasket. The news channels are full of reports, showing stunted corn and blighted fields from the drought. Staple crops such as corn, wheat and soybeans have been hit hard, with crop yields predicted to be among the lowest in years. These three items are used in everything from food to gasoline, items we use on a daily basis as a matter of course.

Most of the time, consumer's don't think about these essential grains and legumes as they are always available, in quantity, and inexpensive. In fact, it could be said we take them for granted. Unfortunately for many, the drought is going to change how consumers view these staples.

Grains as a Commodity and Diet Staple

Corn, wheat, and soybeans are all traded on commodity exchanges, the most famous of which is the Chicago Board of Exchange. The purpose of the exchange is to "normalize" the price of grain for purchase. That way, buyers pay the same price across the country for their supplies with little fluctuation, as opposed to $8 a bushel in New York City and $2 a bushel in Iowa. Exchanges will also play a role in maintaining the cost of commodities as the harvests start to come in during the fall of 2012.

The pinch is yet to be felt by consumers, because the harvest has yet to arrive. Currently, food manufacturers are producing food from stores, and replenish when all of the grains have been processed and sold. Consumers are paying for their food at the old prices, but prices are going to increase shortly as producers have to pay more to buy what they need.

We eat grains in our food on a daily basis. It is a staple of our diet, and is an important item in many of our foodstuffs. Certainly manufacturers could wean themselves away from using HFCS in their foods, and return to sugar without hurting their profits. Another issue is the advent of gluten free foods means another area for the use of corn, putting pressure on the crops and prices.

In short, grains are everywhere we look. They're taken for granted due to their simple commonality in our daily lives. The drought across the nation's breadbasket is going to make us all take a second look at what we eat, and how we eat it.

The Rising Cost of Raising Livestock

The same grains we depend upon for daily meals is the same foodstuffs that are used by livestock farmers who put meat on the table. This is an area of farming that is very sensitive to the cost of grain as well. Adding even $1.00 to the cost of raising a chicken, pig or cow to slaughter weight cuts into the already razor-thin margins of farmers.

Meat animals are fed grain because it increases their growth rate, puts more meat and fat on them, and gives them more energy to thrive. There are arguments about the amount of grain that is being fed to cattle, but the drought has also affected the silage that cattle eat, meaning that this is a no-win situation.

Currently, the cost of meat is dropping due to the amount of animals being sent to slaughter. For those who have the capacity to freeze meat, this is the time to buy. There will be fewer animals on the ground for the next cycle, driving up the cost of all forms of meat.

The Cost of Gasoline is Going to Increase in Some Areas

If you live in an area that is a major metropolitan city, chances are good that you're stuck putting gasoline with ethanol into your tank. Ethanol is directly derived from corn, and makes up to 10 percent of a gallon of gas, depending on what part of the country you're in.

Here, the drought is really going to hurt pocketbooks. Increased prices for corn in turn increases the cost of gasoline, which has its own cascade of effect. Unless the EPA grants temporary relief for the use of ethanol, gasoline costs are going to stay high until something gives with the cost of corn.

What You can do to Weather the Drought

Paying increased prices for staples is going to be unavoidable for all. There is no getting away from what has happened to farmers across the nation. Consumers aren't going to like it, but there is no alternative to what happens when mother nature turns sour.

The only thing consumers can do is to anticipate the upcoming increase in prices, and adjust their budgets accordingly. Start saving a few extra dollars now instead of being stripped later to buy that box of cereal. Make errands count by making all of the stops on one run instead of thinking "Oh, I'll just go back out later for that item." Plan ahead in the short and long term to avoid getting caught off-guard.

Ultimately, the train wreck is a'comin', and we can all see it happening. The best way to weather the coming crash is to be prepared by saving money now, and being a smart consumer later. If 2013 turns out to be a normal growing season, the ship will right itself, cost-wise, but that won't be known until the summer of 2013. There are no crystal balls with commodities.

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