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The drought plaguing American farms is causing crop yields to shrink and prices to soar.But there is a difference between the impact this is going to have on the farm industry and the U.S. economy as a whole.
In a new note, Bank of America economist Michelle Meyer and her team write that the extreme heat wave and drought will have a significant impact on the farm industry, but will have a “negligible effect on the overall economy”.
Impact on the farm industry
The U.S. Department of Agriculture (USDA) has already warned that over 1,000 counties across America are natural disaster areas because of the drought which will hurt corn and soybean yields.
In fact, only 40 per cent of soybeans were said to be in “good or excellent” condition, and farmers expect their corn harvest to be down 12 per cent from their June prediction.
Farmers are seeing their costs rise and yields fall. “Farmers are able to sustain irrigation, but at a high price,” according to Meyer and her team. “They will have to use water from wells, which drains power and is costly. In addition, they will have to be creative in feeding cattle given scorched grasslands.”
Impact on the overall economy
GDP impact: Farm output is less than 1 per cent of GDP and only a major change would impact overall GDP. In the overall economy one of the main areas it will show up in is farm inventories and “this shows some downside risk to Q3 GDP”.
Industrial production: The heat and drought is expected to see an uptick in utilities production, which in turn should boost industrial production. This is expected to be reflected in June and July industrial production data reports.
Inflation: Corn, soybean and wheat prices surged and costs should go up further in July. The impact on producer prices will be more pronounced than on consumer prices. Corn, wheat and soybean all feed into processed foods which means costs will come through but with a delay.
But headline CPI inflation should see a jump due to a “brief pop in food prices”. Moreover, the share in personal consumption expenditure is a touch smaller than CPI suggesting a weaker impact on the measure which is what the Fed targets.
Futures markets are pricing in decline in prices in August and September.
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