The combined effects of widespread drought conditions, and ill-advised government interference in the free market, have created the potential for a perfect inflationary storm for domestic food prices.

Over the past quarter century, the United States has averaged an annual increase of just less than 3% per year in the cost of food. Last year, our rate of food-price inflation spiked upward to nearly 5%. This nearly 50% increase in the rate of food-price inflation occurred even though the acreage planted into corn was at, or near, an all-time high, and crop production was well above average.

At the same time, our national stockpiles of staple crops like corn and soybeans have been depleted to near historic lows. This sharp reduction in the level of stored commodities held in reserve is the direct result of the huge quantities of corn being diverted to the production of ethanol. The federal mandate for ethanol blended fuel, as well as significant federal subsidies to produce ethanol, has created a huge competitive market for corn and its surrogate commodities wheat and soybeans.

The United States produced a record corn crop in 2011 grown on a record number of acres planted to corn. As much as 40% of that record corn crop was shipped to distilleries to produce ethanol for use in motor fuels. Unfortunately, very little of that record crop was added to our country’s food storage reserves.

This summer much of the U.S. bread belt is suffering through its worst and most widespread drought in more than 50 years. The prolonged lack of precipitation is having a significant negative effect on the production of corn, wheat, soybean and other staple crops. In fact, the Secretary of Agriculture has already declared all or parts of ten states as drought disaster areas.

The price of corn and soybeans is at an all-time high and wheat prices are currently at their highest level since 2008. Each of these staple crops is used extensively in the production of beef, pork, poultry, and dairy food products. These record commodity prices will also drive the cost of producing meat and dairy products sharply higher.

I believe that this upward pressure on the price of food will continue for a number of reasons.

The combined effects of the severe, widespread drought and the nearly depleted reserves have created a significant shortage of supply. Additionally, drought conditions in parts of Europe and Asia will undoubtedly create more pressure on the demand for U.S. production.

The ongoing federal government subsidies to market corn to distill ethanol will continue to artificially increase that demand. This government created demand is not likely to abate until the ongoing government mandate requiring ethanol blended fuels is ended.

Higher energy costs to plant, irrigate and harvest crops will continue to drive the cost of farm production higher. These higher energy costs are largely the result of ongoing government mandates to produce uncompetitive alternative renewable energy such as wind and solar power as well as biodiesel.

Crop production on the more marginal lands will decrease, or be discontinued as escalating energy costs exceed the value of the crops that farmers are able to produce.

Irrigated lands are often among the most productive farmlands. However, these lands are also located in the more arid climates where they are often incapable of growing crops without irrigation. They are among the most vulnerable to be caught in the squeeze between production costs and the value of the crops produced. These producers have limited control over the energy costs required to provide water to their crops.

As we travel around the Pacific Coast states we see increasing evidence that escalating energy costs for irrigation are already forcing many producers out of business.The loss of production from these lands will further reduce the supply of food commodities.

The amount of food price inflation at the retail level will depend on a number of factors.

Currently there is a great deal of speculation in commodity food prices. The futures trading on corn, wheat and soybeans is driving prices to record levels as dealers anticipate severe shortages in commodity supplies.

These record commodity prices are in turn driving cattle prices sharply downward as cattle producers factor in the rapidly increasing costs of feeding their livestock. Drought conditions and widespread western wildfires have also depleted traditional summer feed supplies forcing many cattlemen to reduce their herd numbers. While those factors have reduced cattle prices in the short term, the longer term forecast is for higher retail beef prices due to short supplies and the high cost of feeding.

Pricing for dairy, hog and poultry products are intimately tied to the costs of commodity feeds and have already experienced significant increases at the retail level. These increased retail prices are not likely to fall until either the commodity feed prices decrease or consumers reduce their demand due to the higher pricing.

Our nation has certainly experienced drought conditions and poor crop production in the past. So what is significantly different this time? Our historic food commodity reserves are at near all-time lows and federal government energy policies are creating unprecedented demands on supplies as well as creating huge artificial increases in energy costs that are driving retail food prices ever higher.

From my perspective, the only outcome is sharply higher retail food prices in the foreseeable future.

Please remember, if we do not stand up for rural Oregon no one will.

Best regards,

Doug