The Drought's Food-Chain Reaction

By Barbara Rudolph

Rain in the ninth inning of a baseball game is usually no cause for celebration, especially if the home team is losing. But when drops started falling in Kansas City last week as the Royals tried to catch the Chicago White Sox, 23,000 fans let out a rousing cheer. No wonder they were delighted to get wet. Missouri is deep in the heart of drought country: some 80% of its corn crop and more than 60% of its soybeans are in poor-to-very-poor condition. In Chicago the news that scattered showers were sprinkling the blistered Plains and Midwest created a near panic in the commodity pits as traders rushed to retreat from the sky-high futures prices they had been paying during the bone-dry days of late June.

But a few showers were far from enough to break what meteorologists describe as the most devastating dry spell in 50 years. If the drought stretches through the summer, its economic effects could prove as far-reaching as a cloudless Montana sky. Any sizable increase in inflation is still remote, but a persistent drought could bring higher prices for products ranging from cherries to Christmas trees, breakfast cereal to beer. While farmers fortunate enough to have a healthy crop will enjoy the windfall of higher prices this year, the shriveled overall yield could reduce U.S. agricultural exports in the long run by losing market share to foreign competitors.

Most notably for consumers, the cost of food is going up. The Government reported last week that prices paid to farmers for grain crops rose 3.7% in June alone, after increasing 6.1% during the first five months of the year. Since January, soybean futures prices have risen from $4.70 per bu. to more than $10, and traders are talking about "beans in the teens" by year's end, which would break the record high of $12.90 reached during a shortage in 1973. As a result, the Department of Agriculture now estimates that food prices will rise between 3% and 5% this year, but those estimates may prove optimistic. John McMillin, an analyst for the investment firm Prudential-Bache, foresees a possible double-digit increase in food prices during 1989.

Many of the increases will start with the raw material and pass through to finished products in ways that consumers may not expect. Corn, for example, serves as the basis for everything from cattle feed to margarine, and the crop is severely threatened. If below-average rainfall persists through mid-July, when the plants are pollinated, up to half of the crops could be lost. The sale of stockpiled crops from previous years will mitigate the effects of the drought, but rising corn prices are already putting pressure on cereal makers. General Mills last month boosted the retail prices of its breakfast brands 5%. Kraft is charging 8% more for its soybean oil-based margarine.

The winter-wheat harvest escaped the effects of the drought. But the spring- wheat crop in a belt from Montana to Minnesota, which accounts for one- fourth of the year's total harvest, may amount to only 250 million bu. That is less than half of last year's level. Result: consumers are likely to pay higher prices for pasta, much of which is made from the northern durum wheat. Should the drought persist through the summer, the same will hold true for soybean- based foods, which range from trendy tofu to salad dressing.

The drought is likely to send meat prices down at first, then higher next year. Many ranchers cannot afford the corn and soybean meal to feed their herds. At the same time, much of the pastureland their cows normally graze has been scorched. As a result, ranchers are slaughtering many more of their cattle than usual. As the meat comes to market, retail prices for beef and pork should decline for the next few months. But by next spring the herds will be reduced, and prices are likely to increase as much as 10% from their current levels. The calf herd is expected to drop below 39 million head next year, the lowest since 1952.

The drought-inflated crop prices are a godsend for any farmers in areas of normal rainfall or for those who have silos full of stockpiled grain from previous years. In addition, higher crop prices could help reduce the federal budget deficit, since the Government will be liable for fewer farm-support payments (last year's total subsidies: $23 billion). Some of the savings, though, will be given as aid to drought-stricken farmers.

Yet if the drought drags on, it could start to harm the economy. Although food costs account for just 17% of the Consumer Price Index, double-digit increases in that component could push the overall inflation measure upwards by a percentage point or two. Some economists, like David Jones of the investment firm Aubrey Lanston, believe the food-price run-up will combine with rising wages and other commodity shortages to set off a genuine inflationary spiral. (The price of aluminum, for example, has risen more than 75% during the past year, while copper is up more than 50%.)

Higher prices mean the dollar amount of agricultural exports could rise this year even as the actual volume may fall. Producers in Europe, South America and Australia will step in to meet the demand that U.S. growers fail to serve. Once those competitors gain market share, American farmers will have to struggle to reclaim it. That is just one more reason they are praying for rain and cheering every drop.

With reporting by Gisela Bolte/Washington and Lee Griggs/Chicago