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The epic drought – the worst in 56 years – that has wreaked havoc on more than half the United States is setting up 2013 to deliver record-high U.S. food prices that will affect more than just our grocery budgets.
As the drought continues to kill crops throughout the Midwestern U.S., a region known as the "corn belt" because it produces 40% of the world's crop, the problem reaches farther than the dry U.S.
Now the United Nation's Food and Agricultural Organization (FAO) warns that if countries, including the United States, restrict exports on concerns of higher grain prices, the world could face a kind of food crisis like the one seen five years ago.
"There is potential for a situation to develop like we had back in 2007/08," Abdolreza Abbassian, FAO's senior economist and grain analysts told Reuters. "There is an expectation that this time around we will not pursue bad polices and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible."
Abbassian added, "The very strong appreciation of the dollar, and the surge in prices, is basically a double blow which is going to be quite stressful for some of the more fragile countries."
Rising Food Prices Stall Economic Recovery
The FAO Food Price Index jumped 6% in July after three months of declines. Grain markets got a boost from speculation that Black Sea grain producers, particularly in Russia, might levy export restrictions after a drought there walloped crops.
A study conducted last year by the National Center for Atmospheric Research, based on some 70 years of weather data, found that from heat waves to cold snaps to droughts, weather could cause up to a 1.7% rise or fall each year in the U.S. economy's gross domestic product. In 2011, not counting extreme weather events like tornadoes or hurricanes, the amount was $507 billion.
Jeff Lazo, one of the study leaders, told USA Today that the findings are significant "especially when GDP is growing a percent or so a year, if that."
The higher price news is bad for economies all over the world. Unemployment remains at an unhealthy level in the United States and abroad, the Eurozone sovereign debt crisis continues to worsen, and emerging markets are decelerating. Rising food prices will only add to these woes.
The Other Effects of Higher Food Prices
High food prices can damage much more than struggling economies.
World Bank President Jim Kim is already cautioning that rising food prices can force families to eat cheaper, less healthy food or even drag kids out of school, steps he says that "can have catastrophic lifelong effects on the social, physical and mental well-being of millions of young people."
Plus when families are forced to dole out a greater share of their weekly paycheck to food staples and other basics, they have less to spend on discretionary items.
Dubbed the consumption effect, this could have a major impact on the U.S. and other advanced economies where elevated unemployment levels have already curtailed spending and stretched finances of the average household to the brink.
Increased food prices often lead to higher inflation. Called the policy effect, this could encourage central banks to respond by raising interest rates in attempts to get a handle on the upward pressure on prices, which in turn would slow down growth. This could be a huge problem in developing countries.
With economic growth already showing signs of slowing in China, Brazil, India and elsewhere, central banks have been encouraged to cut rates. But, higher inflation could restrain that effort by forcing central banks to keep rates high to control inflation, even if growth wanes.
The ripple effect will be felt worldwide as emerging markets are paramount players in global growth.
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Potential grows for food crisis as prices surge-UN
U.N. warns of possible food crisis