U.S. drought drives up food prices worldwide

NEW YORK (CNNMoney) -- The drought that's drying up the Heartland isn't just an American problem. It's causing food prices to surge worldwide.

And it could get worse.

"This is not some gentle monthly wake-up call, it's the same global alarm that's been screaming at us since 2008," said Colin Roche of Oxfam, noting that the drought could lead to food shortages for millions of people worldwide.

Food is a major U.S. export, so the drought affects prices around the globe.

"World leaders must snap out of their lazy complacency and realize the time of cheap food has long gone," Roche said.

In July, food prices jumped 6%, after three months of declines, according to the United Nations' monthly Food Price Index released Thursday. The main drivers behind the increase? Grain prices. And more specifically, corn prices, which have hit record highs in recent weeks.

According to the U.N. report, global corn prices surged nearly 23% in July, exacerbated by "the severe deterioration of maize crop prospects in the United States, following drought conditions and excessive heat during critical stages of the crop development."

"It's going to have a big impact [on consumers]," said Sam Zippin, an analyst at financial information firm Sageworks. "Corn is in almost everything."

Food prices have been creeping up throughout the United States, as hot temperatures across the Midwestern and Western parts of the nation have dried out crops and driven up the price of corn and grain.

The U.N. index of cereal prices soared 17% last month, creeping closer to its all-time high set in April 2008.

Paul McNamara, associate professor at the University of Illinois' College of Agriculture, said grain prices could rise still further, as cattle ranchers look for a substitute to corn, the most expensive feed.

Meat prices actually declined modestly, according to the U.N. report, but that was partly due to ranchers culling their herds to curb prices they have to pay for corn-based feed,

McNamara said the increases in corn prices and the weak harvest will also put pressure on policymakers to change the current U.S. policy towards ethanol, which mandates that nearly 10% of the nation's fuel supply comes from corn.

Aside from corn, some of the most dramatic increases in food-flation were in the fats and oils because they use soybeans, which have also been hurt by the drought. And that translates into higher prices for margarine and peanut butter.

The U.N.'s price index of oils and fats notched up 2% in July.

And the price of sugar -- another household staple -- spiked 12% in July, though the U.S. drought wasn't to blame.

"The upturn was triggered by untimely rains in Brazil, the world's largest sugar exporter, which hampered sugarcane harvesting in July," said the U.N. "Concerns over delayed monsoon in India and poor precipitation in Australia also contributed to the price increase."

What's next. Expect meat prices to move higher into next year as ranchers get their cattle inventories to manageable levels.

"You might have some extra supply this year as people liquidate their herds," said McNamara. "[But] you're going to have, a year from now, tighter supplies as people reduce their herds in the U.S."

Going forward, the severity of food inflation depends on how long the drought in the United States lasts, as well as the weather conditions in major food-producing countries like India and Russia, said David Hallam, director of trade and markets for the U.N.'s Food and Agriculture Organization.

Hallam said the world food supply isn't as lean as it was during the international food crisis of 2007 and 2008, because, even though corn prices are prohibitively expensive, consumers have other foods to fall back on.

For now.

"If countries start unilaterally panic buying or restricting exports, that could make a bad problem worse," said Hallam. "The situation right now is one of heightened vulnerability to any future shocks."

Consumers will get a better idea of where prices are headed Friday, when the U.S. Department of Agriculture releases its World Agricultural Supply and Demand Estimates, which forecasts supply and demand for crops and livestock around the world.