Special Report: Western Drought Watch: Feeling fleeced by pricy filets? Meat, fruit and oats lead the drought-driven surge in food costs

Meats have led the rise in U.S. food costs, with prices for fresh fruits and cereals, including those made from oats, also strongly higher this year, on the back of drought conditions in parts of the nation.

And restaurant menu price increases, known as “food-away-from-home” prices, have outstripped the rise in “food-at-home,” or retail store prices.

There was a general “lack of flexibility” across restaurant menus, given higher labor costs and tighter inventories of specific food items, says Isaac Olvera, lead food and agricultural economist at ArrowStream, a food-services industry supply-chain technology firm. That all contributed to the increase in menu prices since the onset of the pandemic, he says.

The consumer price index in September for the food-away-from-home category was 4.7% higher than the same month a year ago, while the food-at-home CPI was up 4.5%, according to the U.S. Department of Agriculture.

Read: Rising wheat prices have French fretful over the cost of a baguette

Labor remains a large challenge, and COVID-related protocols, such as those related to employee proximity, are “keeping plants from operating at 100% capacity,” says Olvera.

A USDA report in September noted that the “physical proximity” of workers in the meatpacking industry was was much greater compared with other manufacturers. Meatpacking-dependent U.S. counties saw nearly 10 times more COVID-19 cases in early May, compared with other manufacturing-dependent counties.

Meat demand, meanwhile, remains “robust” despite record high pricing in most cases, with demand coming in strong from a domestic as well as international level, as the U.S. continues to “export meat protein products at a robust pace,” Olvera says.

On the futures market, prices for live cattle LCZ21, -0.79% LC00, -0.79% and feeder cattle FCF22, -1.02% FC00, -1.02% were each up by over 13% this year as of Oct. 28, and lean hogs LHZ21, +1.06% LH00, +1.06% up 7% .

Read: ‘Weather extremes appear to be increasing’: Drought conditions send oats, wheat and other commodities soaring

Olvera points out that “the pandemic-led, to-go movement has been a boon for the industry,” as foodservice sales have pushed above grocery store sales.

‘The pandemic-led, to-go movement has been a boon for the industry.’

— Isaac Olvera, ArrowStream

Beef and veal, as well as pork, prices are predicted to rise by between 6.5% and 7.5% this year, according to the USDA.

“We wouldn’t be surprised to see that as too low heading deeper into the fourth quarter,” especially on the beef side, says Olvera. The USDA’s 7.5% increase forecast for both red meat categories are “likely to the lower end of our expectations,” which remain closer to the 7% to 9% range for the red meat categories.

Fresh fruits are another big mover this year, with labor, transportation, drought and demand leading to the price increases, he says.

As of Oct. 28, more than 83% of California, which is among the biggest fruit-producing states, was in an “extreme drought,” which means water is inadequate for agriculture, wildlife and urban needs, according to Drought.gov. The recent, severe storm wasn’t expected to put much of dent into that drought.

Read: California’s ‘atmospheric rivers’ and ‘bomb cyclone’ bring scant long-term rain relief — a look at the Western drought by the numbers

But Olvera is “most concerned with the transportation aspect” when it comes to the rise in fruit prices, and said transportation isn’t exclusive to the fruit category.

“Refrigerated truck availability has been near its tightest, or the tightest on record since at least 2000,” says Olvera. Since mid-year, the USDA’s refrigerated truck availability index has been the tightest in the report’s history in 12 out of 15 weeks, and the rate per mile is “soaring at record levels,” he says.

Forgo those Cheerios?

Also among the key commodities, oats has seen the biggest price rise, with futures prices OZ21, +3.20% up 97% year to date.

Spring wheat and oats have been “cut from the same cloth,” says Olvera. “Persistent drought throughout the Northern plains has contributed to stunted harvested area and poor overall production.” Wheat futures WZ21, +0.06% W00, +0.06% trade nearly 21% higher this year.

A USDA report on small grains released in late September estimated that oat production in 2021 would be at 39.8 million bushels, the smallest on record, down 39% from 2020, with farmers only harvesting 650,000 acres of oats of a planted 2.55 million acres.

Read: ‘Toilet to tap’? As the climate keeps changing, more municipalities aim to recycle our most precious resource

Abandoning 1.9 million acres is “actually relatively small,” says Olvera, but what’s “troubling” is the percent of acres harvested. At just 25.5%, that’s “a record-small percentage of an already record-small planted area,” he says.

“There’s not likely to be a lot of oats around ahead,” he says, and they’re a breakfast staple for things like oatmeal and other products that include whole grains such as breads, some breakfast cereals and snack bars. Drought has “plagued major growing areas” across the Northern plains, as well as the southern prairies of Canada, where spring wheat and canola are grown, says Olvera.

At the same time, the beef cattle sector has seen the largest U.S. beef cow slaughter rate since 2011 and as the herd contracts, this can “certainly spell persistently higher beef prices ahead,” he says.

“Feed costs are elevated and pasture conditions are poor,” Olvera says. Also, amid drier weather and elevated feed costs, dairy cow slaughter rates are increasing, so while dairy price increases this year have been muted, “we’re expecting prices to firm heading into 2022.”

Even so, the major impact of drought hasn’t yet been felt quite yet, he says.

Overall, costs for food have been “feeling the production, transportation and labor squeeze, but we’re likely to see drought impacts picking up into 2022 as smaller beef cow herd is noted, leading to fewer overall calves,” and a smaller market animal availability over the coming 16 to 24 months, says Olvera.

Holiday impact

‘Pretty much all indicators are pointing towards higher holiday food prices across the board.’

— Isaac Olvera, ArrowStream

That said, increases across the consumer price index for food at home and away from home are likely to “narrow,” but “it doesn’t look like food prices are going to come down materially in the near term,” he says. As families gather for what may be the first big celebrations since the pandemic began, “pretty much all indicators are pointing towards higher holiday food prices across the board.”

He points out that turkey supplies remain tight so “pick up that holiday turkey between now and early November.” Year-over-year September poultry prices have climbed by 6.1%, USDA data show.

The supply of turkeys won’t run out, but “late shoppers may have slimmer pickings,” says Olvera.

Read more about drought conditions in MarketWatch’s Special Report

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