Amid what’s been a recent hot spell nationwide, headlines lamenting a broad US drought have some doing a rain dance. And Thursday, many pondering the drought’s economic effects were rampant. Specifically, fears the drought could exacerbate overall higher food prices —sapping consumers’ pocketbooks and sending the US and the rest of the world into an economic dry spell.
However, these fears seemingly operate on the notion consumers are super-duper fragile—a thesis that’s hard to substantiate with data, considering consumer spending’s relatively stable 70% share of US GDP over the years. Throughout those years, we’ve faced similar and other potentially economically derailing natural and man-made phenomena. In fact, as far back as we can measure, markets and the economy in every year have contended with uncertainty and reasons for worry, but just as often as not, markets (and the economy) do just fine in the face of such fears. Droughts causing global food inflation are no different. Just last year, rising global food prices were a contributing factor in the Arab Spring movement that displaced many authoritarian regimes across the Middle East. Yet the global economy expanded to new all-time highs.
Today, with about 55% of the US in a technical drought, fears have risen anew right along with corn and soybean prices. To be sure, rising corn and soybean prices can impact things like meat and dairy as well (corn is a common feed for cattle and chicken). However, it’s important to note the majority of retail food costs come from things like transportation, packaging, processing and marketing—raw commodity costs for most items are but one factor, and spikes in that factor are very often short-term in nature (and can often be mitigated by productivity gains and more). Likewise, there’s a number of things worth considering should you fear the $20 Corn Pops box. First, consumers have other options: Rice supplies—arguably the more important global crop—remain relatively plentiful, and prices are well below previous highs. So consumers might just switch from Corn Pops to Rice Krispies. Second, that we have higher crop prices today doesn’t necessarily mean they’ll continue to be elevated down the line. Weather shifts. And if it doesn’t, suppliers can—farmers globally (including the US) see higher US corn prices and decide to plant more corn, boosting their profits and satiating demand.
What’s more, while food prices might be rising, other prices are falling—explaining in part why June’s headline Consumer Price Index (CPI) was a tame 1.7% y/y. For example, in Tuesday’s CPI report, energy prices were down 3.9% y/y, more than offsetting food’s 2.7% rise. Core CPI—without food and energy’s volatile effects—was up 2.2% y/y in June. Darn near the Fed’s 2% target. So, looking forward, weather may improve. Or not. (Rain dances notwithstanding.) Our suggestion is to not fret higher food prices’ putting a Cap’n Crunch on consumers or the global economic expansion. Because the reality is the market can, has and likely will again adapt to and deal with such changes.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.