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Originally published August 29, 2012 at 9:24 PM | Page modified August 30, 2012 at 8:17 AM

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Midwest drought to hit home with higher food prices

The government expects food prices to climb 3 to 4 percent next year because of higher meat prices.

Seattle Times business reporter

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Costco Wholesale already is paying more for chicken.

It hasn't passed the increase on to customers yet, but the federal government says consumers will pay 3 to 4 percent more for food next year — largely a result of the drought in the Midwest, which has decimated a corn crop used to feed chickens, pigs and cows.

"Pork will be next. Beef can take longer," said Jeff Lyons, Costco's senior vice president of fresh foods.

The worst drought in decades is expected to reverberate in the meat-consuming public's pocketbook, as fewer animals and more expensive feed crops rock the economics of the cattle, pork and poultry industries.

Many are bracing for higher prices, but how high they will go remains unknown while the drought and its impact, along with other food-price variables, play out.

Chicken suppliers have tried to pass along their entire 7 percent cost increase, but Issaquah-based Costco agreed to pay only part of it.

"They're trying to get healthy all at once," Lyons said, "and we said, 'We can help you right now and then see what takes place. The corn is not even in the barn yet.' "

If the government curbs its plans for ethanol production, for example, there will be more corn to feed livestock, he and others said. And if the corn harvest in Latin America is strong, corn prices could drop — sending chicken and pork down as well.

A longer-term problem could be the cattle supply.

Their numbers are already low from years of ranchers getting out of the business and a lingering drought in Texas and Oklahoma. The past 15 years have seen a 10 percent drop in the number of cattle and calves — to 97.8 million animals, the lowest in decades.

With the price of feed skyrocketing, ranchers are selling cows earlier than they wanted to avoid pouring more money into them — and increasing the supply of cattle takes longer than it does for chickens or pigs.

Ranchers also are selling heifers for slaughter. Rebuilding the supply of mother cows will take even longer than simply raising new calves.

The short-term result is a glut of fresh beef, which sent prices down this summer.

Payback is expected beginning in the winter, when there will be fewer cattle to slaughter and fewer heifers than usual to rebuild the supply.

So far, Washington cattle ranchers are not suffering from the feed-price increases. Some have their own corn and hay, said Nate Hair, president of the Cattle Producers of Washington who runs Rock Creek Cattle in Edwall, Lincoln County.

Hair might even benefit. He plans to buy 40 to 45 pregnant cows this fall and sell them next spring when prices are expected to be higher.

The trick is to dodge a drought or other catastrophe while the animals are growing, he said.

"Farmers have the Farm Bill and various programs to fall back on, but ranchers are the last of the Wild West," Hair said. "We don't get into the politics of taking any money. We're gamblers."

But not everyone can capitalize on the expected price increase.

Jerry Haun, who owns a small meat-processing operation in Walla Walla called Haun's Meats, said he has lined up fewer jobs this fall because some of the small farmers he works with could not afford to buy and feed as many cows as they had hoped at this year's prices, even though prices are expected to rise and stay high next year.

Although corn prices have doubled, Ralph Cavalieri, director of the Agricultural Research Center at Washington State University, said other factors could be more important.

"The price of grain is a small component of the price of food we ultimately buy," Cavalieri said. "Many other factors figure in there, chief of which is energy cost."

The energy that goes into processing, packaging and transporting food could affect prices more than the drought, he said.

As an example, Cavalieri figures the cost of corn in a 12-ounce box of cornflakes has risen from 5 or 6 cents to 11 cents since 2004 — most of it this year, because of the drought. Yet the price of that box to consumers rose from about $3 in 2004 to $3.80 this year.

"The cost of corn is a very small component of the cost of a box of cornflakes in the retail market," he said.

That reasoning has led Dwayne Northrop, founder of the Everett-based pizza chain Garlic Jim's, to buy ingredients as close to Washington as he can to cut energy costs.

"We're seeing none of it," he said of drought-related cost increases. "Our boxes are made by Smurfit-Stone in Portland, most of our meats come from California and our cheese is from Idaho."

Northrop used to buy cheese from Buffalo, N.Y., but found a supplier in Idaho a couple of years ago after fuel costs spiked.

He also brought production of gluten-free crusts in-house, which means price increases on a national scale are less likely to hurt him.

"If something happened in Washington that hit flour, then I'd be scrambling," he said. "But at the [franchise] store level, it helps me, because I eat the price increases that [food supplier] Sysco would pass on."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com. On Twitter @AllisonSeattle.

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