Affecting the cost of animal feed and lowering the amount of milk from cows, the drought is pushing up milk prices.

The US Drought and Pizza

Sep 11, 2012 • 207 Views

Discussing the impact of this summer’s drought on pizza, Stephen Colbert said, “It is one thing for global warming to make the sea levels rise but nobody told me it could make my cheese levels recede.”

Colbert was reacting to an economist at the US Department of Agriculture’s Research Service saying, “…you’ll see less cheese on pizzas and in salad bars.” The reason? In 90 degree temperatures cows produce less milk, dairy farmers need costly sprinklers and fans, and the drought has also driven up the price of animal feed. As a result, milk is more expensive and more expensive milk means more expensive cheese.

Just imagine your cheese supply curve. When the cost of production increases, the upward sloping supply curve shifts to the left and crosses the downward sloping demand curve at a higher equilibrium price and a lower quantity.

Colbert also suggested that farmers switch to drought resistant crops like sun-dried tomatoes and raisins.

Because of the drought that is affecting close to 63% of the continental US (please see map below), in addition to dairy industry costs, 52% of the corn crop was in poor or very poor condition, more cattle was slaughtered because of skyrocketing feed costs, the price of ethanol has risen, and the northbound barge trip between New Orleans and Memphis takes 3-5 extra days. (With lower water levels, barges need to shed weight and also take turns moving through shallow areas.)

If the drought continues, the Department of Agriculture predicts a 3-4% hike in food prices for 2013. Since last year, food prices have gone up 2.5% to 3.5%. And finally, very interestingly, economist Ed Yardeni explains in his blog why QE3, the drought and the GDP are related. As with food prices, it all relates to inflation.

Sources and Resources:

My stats, the stories and the map below are from either this WSJ article, weather.com, or this USA Today report. A video excerpt from the Colbert Report was the source of all that Stephen Colbert said. Looking at my sources and their links, you will see the multiple ripple of impacts, ranging from pizza to crop insurance to a miniature golf business, that this drought has created.

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