The Short-and Long-Term Costs of a Severe Drought on Retail Peanut Butter Prices and Consumers

Abstract

This article investigates the short-and long-Term costs of an extreme weather event on retail food prices and consumer expenditures. We utilize the 2011 severe peanut drought as a quasi-natural experiment and find that retail peanut butter prices increased 21.3% as a result of the drought-driven shock in farm peanut production and prices. Moreover, we identify long-Term costs due to positive asymmetric price transmission as retail peanut butter prices returned to pre-shock levels much more slowly and remained on average 6.2% higher for 4 years after farm peanut prices returned to pre-shock levels. For consumers, the drought increased peanut butter costs, and the persistence of higher prices in peanut butter led to long-Term consumer costs. Peanut butter expenditure on average increased by 4.8% post-shock, with lower-income households increasing expenditures even more. A simple calculation estimates that higher peanut butter prices inflicted a cost of $1.08 billion during the shock, and sticky post-shock peanut butter prices imposed a cost of $628 million to U.S. consumers.