And what you can do about it

3 Ways the Drought Will Affect Consumers

by Gary Foreman

According to experts, the drought hitting the U.S. this year is the worst since the 1950s. More than 60% of the country is experiencing drought conditions. And, while the brunt of the damage will be borne by farmers, all consumers will be affected.

While the drought has touched many portions of the country, corn growing areas have been especially hard hit. The result is that corn prices are at an all time high around $8 per bushel. Soybean prices are also at highs.

Consumers will be affected in three ways: at the grocery store, at the gas pump and in their electric bills.

Grocery Prices

The biggest effect that consumers will feel is at the grocery store. Corn and food ingredients made from corn are used in 75% of all grocery products. So rising prices won't be limited to canned and fresh veggies. Higher prices will be found throughout your grocery store.

You'll begin to see some prices rise in the next six weeks, especially on fresh corn. But the big price shock won't happen until the beginning of 2013. For 2012, the USDA forecasts all grocery prices increasing 2.5% to 3.5%. Beef and veal are predicted to go up 4% to 5%.

Corn and soybeans are a major feedstock for beef, pigs, and chicken. In fact, about 40% of the total cost of bringing beef to market is the cost of feed. Some experts disagree with the USDA and predict that beef, poultry, pork, milk, and eggs will be more seriously affected. Prices could rise 10% on these items.

What you can do - Use sales to stock up on meat this fall. Some farmers unable to buy expensive feedstocks will bring their animals to market early. That may lower prices temporarily. Take advantage of the opportunity, but don't buy too much. Meat will not keep in your freezer indefinitely. Most ground meat will be good for three months, and roasts and steaks will be good for six months. Package meats properly for the freezer. Store wrapping isn't enough. Don't forget to mark what's in the package and when it went in the freezer.

Begin to shift away from processed foods. They're always more expensive than raw foods you prepare yourself. Plus, they're full of ingredients made from corn or soybeans that will be increasing in price. Many prepared foods are quite easy to make yourself. Spend some time online to learn how.

Gasoline Prices

The drought will affect gas prices. According to the USDA, 40% of the entire U.S. corn crop is used to produce ethanol. This year refiners are required to buy a minimum of 13 billion gallons for blending into gasoline. So no matter how high corn prices rise a large amount will go to making gasohol. That could make prices more volatile.

Fortunately, corn is only a small part of the cost of gasoline. Therefore, changes in the price of crude oil will likely have a greater impact on the price of gasoline, but reducing the amount you spend on gasoline is a good idea in any situation.

What you can do - Reduce the number of miles that you drive. Not only will you buy less gas, but you'll reduce the cost of maintenance, lengthen the life of your car, and might even lower the cost of insuring it.

Maximize the mileage you get out of every gallon of gas. We all know that the EPA mileage estimates are baloney, but you can stretch your mileage by the way you drive and maintain your car or truck. By treating the gas pedal gently, replacing air filters and keeping tires inflated, you'll see an improvement in your MPG.

Electricity Costs

Many electric generating plants use water for cooling. With the drought, they don't have enough water to run at max capacity. The result is that less electricity is generated and power companies pay more to produce or buy electricity. Some shortages may occur.

What you can do - Make sure that your air conditioner is running at peak efficiency. You'll reduce your electric bill and the strain on the electric company, too.

Reduce the amount of heat that your air conditioner needs to remove from your house. Make sure your home is properly caulked and insulated. Draw drapes over sunny windows. Limit the use of ovens and clothes dryers. Consider the installation of attic vents or fans.

Keep your air conditioner working efficiently. Clean or replace inside filters. Make sure that air can flow around the outside air compressor. Shade the compressor if possible. Use fans inside your home. Bump your thermostat up a degree or two.

Remember that there's no need to panic. Experts still expect this to be the third or fourth largest corn crop in US history. Some prices will go up, but in amounts that should be manageable for the average consumer. You may need to shift some money from other categories to your grocery budget, but you will be able to feed your family and drive your car unless oil prices go crazy.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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