California Drought Expected to Drive Food Prices Higher

The Chief Economist of the United States Department of Agriculture (USDA) expects U.S. food inflation to increase between 2.5 and 3.5 per cent in 2014.  The recent releases of Agriculture and Agri-food Canada’s (AAFC) Medium-term Outlook (MTO) (report) and the USDA Outlook (report) emphasized a softening of grain and oilseed prices and continued strength in livestock prices. Does this mean food inflation is driven by the higher livestock prices?

Partly. Tight red meat supplies and improvements in the U.S. economy will almost certainly lead to higher food inflation in 2014; however, higher vegetable, fruit and nut prices will be the primary driver of food inflation.

Improved precipitation in 2013 and 2014 has eased drought concerns across the “Corn Belt” and along the east coast; however, drought conditions in California have heated-up. As a result, competition for scarce water resources has intensified between urban and agricultural consumers.

Why do we care about the California drought in Canada?

California accounts for roughly two-thirds of U.S. fruit and nut production and one-third of U.S. vegetable production. Although the California drought is far from Canada’s borders, the overall supply in the North American marketplace will be tighter than in recent years. Lower supply of fruits and vegetables drive up the price paid to producers and ultimately to consumers.  The lower Canadian dollar will only amplify the resulting price impact in Canada. 

Craig Klemmer, Portfolio Analyst and Agricultural Economist