The widespread drought has caused much attention on the impact of the rising price of corn on food prices.
While there is no doubt the higher corn prices we are observing are going to affect what we pay for groceries, it varies considerably on the food product and the time period being considered.
Overall, only about every 15 cents out of every dollar consumers spend on food can be attributed to value of farm products. Packaging, storage, transportation, labor, profits, among other non-farm items comprise 85 percent of what we pay in the grocery stores for our food.
The impact of higher corn prices has a much greater impact on the cost of meats and dairy products than on processed foods (such as corn flakes) and beverages (corn-sweetened soft drinks).
Most analysts conclude that even with the near doubling of corn prices in recent months, a $3.50 box of corn flakes contains less than 10 cents of corn, while a $1.50 per liter soft drink sweetened with high fructose corn syrup has less than a nickel of corn.
Thus the recent escalation in corn prices has only added a few pennies to the cost of many processed food and beverage items that use corn as an ingredient.
Actually in the short-run, we could see meat prices decline (or at least stablilize) due to the drought forcing herd liquidations and thus inducing higher short-term meat supplies.
But as livestock inventories shrink, future meat supplies will be lower and consequently we should expect higher meat prices this winter and early in 2013. Currently USDA is projecting meat price increases of 3.5 to 4.5 percent in 2012.
Overall, USDA is projecting that food prices will increase 2.5 to 3.5 percent in 2012 versus historical annual food price increases of 2 to 2.5 percent which is a surprise to many.
Some food products such as fruits and vegetables (including corn on the cob) are produced with access to irrigation and thus are not as much impacted by the drought.
Another factor that could limit food price increases is the current intense competition in the food retailing industry.
Finally many food items that are impacted by higher corn prices, such as milk, meats, and soft drinks are often used as loss-leader items as food retailers offer specials on these items to attract customers to their stores.