July 27, 2012 at 7:24 AM ET
Magnolia Bakery, a posh New York City-based cupcake chain, is in many ways insulated from America's heartland -- its tumultuous politics, its strip malls, and, most recently, its parched farmland that now blankets thousands of miles of the center of the United States.
But as the Midwest is in the throes of the worst drought to hit the United States since the 1950s, the CEO of Magnolia is bracing for the dry weather's ramifications from the company's headquarters in Manhattan.
"This drought is going to affect us in many ways," Magnolia CEO Steve Abrams says. "We just don't know how badly yet."
Aside from the price of wheat, which has increased 55 percent in the last month according to Reuters, Abrams is most worried about the cost of fuel. The damage the drought has done to the U.S. Corn Belt has sent ethanol prices soaring -- and has caused some ethanol plants to halt production. That means Magnolia is likely to face fuel surcharges as it trucks its already pricey wheat across the country.
Abrams says he even expects the dairy farms he sources from in upstate New York to raise their prices, because of the increasing cost of running tractors and transporting ingredients to New York City.
"These are costs I have to absorb. It's not like I can charge customers a fuel surcharge with their cupcakes," Abrams says, adding that he has not yet calculated how high those charges will be. "It's amazing the cascade of issues this drought creates and the ripple effects it's causing across the economy."
The scariest part is, Abrams knows, in comparison to other sectors of the small-business community, the problems his business will face are slight.
About one-third of the United States has now been declared a disaster area by the U.S. government. While all eyes are on farmers, who feel the most direct effect of a dry growing season, the actual scope of the drought's effect on other small businesses could also be enormous. So huge, in fact, that the Small Business Administration is now offering disaster-assistance loans of up to $2 million for nonfarm businesses and nonprofits in more than 1,400 drought-afflicted counties.
One major source of the problem, of course, is corn, a fuel source, a food source, and a key ingredient in feed for animals. On Sunday, the National Agricultural Statistics Service released a report declaring that nearly half the country's corn is in "poor" or "very poor" condition. Although rain on Tuesday gave Midwestern farmers some hope and caused corn prices to fall slightly, to $7.90 per bushel, experts say much of the damage has already been done.
"Corn matures by about Labor Day, but what happens in dry conditions is it shuts down early if it doesn't get any moisture," says Kevin Kimle, an agricultural economist at Iowa State University. "When the cost of a base ingredient like corn goes up, it fundamentally affects everything."
According to Brian Fuchs, a climatologist at the National Drought Mitigation Center at the University of Nebraska, this means the meat industry is expected to take an especially severe beating. The higher corn prices get, the harder it is for farmers to feed their livestock, meaning animals are being sent to slaughterhouses in droves.
"This creates a glut of meat and forces prices to go down in the short term," Fuchs says. "Once that glut is gone, prices spike from lack of supply, and it will take several calving seasons to build that supply up again."
Executives at Hurricane Grill & Wings, a restaurant chain based in West Palm Beach, Florida, are already working on what COO Mark Snyder calls "menu engineering," in preparation for those price increases. Because poultry prices are expected to increase soonest, the chain will begin promoting pork, seafood, and beef items in the short term. Once beef and pork prices spike, as they’re expected to next year, executives plan to reduce portion sizes and supplement meals with lower-cost sides.
The heat and dry conditions have already taken a toll on the size of animals raised for meat, says Herb Eckhouse, co-founder of the artisan cured meat company La Quercia, based in Norwalk, Iowa. About a month ago, he began noticing the hams being delivered to his factory were getting progressively smaller. La Quercia pays suppliers by the piece, not by the pound. That means that though Eckhouse's costs remain the same, the amount of meat he's getting is diminishing significantly. Prior to the drought, Eckhouse was planning on expanding to a larger facility to keep up with growth. Now, he says, that may not be necessary. It may not even be possible.
"My concern is, what happens next year when the meat supply just isn't there?" Eckhouse says. "I've been involved with agriculture in the Midwest for 30 years, and this is entirely outside of my experience."
Even businesses that aren't tied to grain or meat have felt the strain. The U.S. Drought Monitor has collected stories of boating companies struggling from falling water tables, golf courses suffering from irrigation restrictions, and waterparks forced to shut down rides. Another odd side effect?
"This Christmas, there will be no kissing under the mistletoe," says Michele Sutton, owner of Sutton Ferneries, a Doral, Florida-based distributor of fresh flowers and foliage. Sutton says the drought has completely wiped out the country's supply of mistletoe, a seemingly small detail that she says will cost her more than $40,000 in sales this holiday.
Equally indicative of the drought's strange ripple effect are the businesses that are actually benefiting from the lack of water. Wheeler Drilling, a residential water well company in Odessa, Texas, has drilled wells at nearly twice as many homes this year as it did last year, thanks to citywide water restrictions that took effect in April. And at Woods Basement Systems, a foundation remodeling company based in Collinsville, Illinois, business is booming, as the dry soil is causing foundations to settle and crack. "If it continues like this, it'll be a record year," says Tim Warchol, the company's director of commercial sales.
Of course, not everyone will be so lucky. Gary Bohrer was 19 years old when he founded the Waukesha, Wisconsin-based landscaping company Central Services in 1974. Now, he's counting down the months he can keep the company afloat. That is, if it doesn't rain soon.
Since May, Bohrer's business has been at a near standstill. Planting trees, sodding, and maintaining landscape, three of Central Services's key offerings, are simply out of the question in severe drought areas such as Waukesha. In the average year, Central Services generates about $2 million. This year, Bohrer says, he'll make well under half that, if he's lucky. As a result, Borhrer says, he's been forced to fire 18 of his 26 employees, some of whom had worked for Central for the past 20 years.
"I saw it coming, but it was still incredibly hard," Bohrer says. "This is usually the heyday of our working season, when our guys are making overtime. I know it's not going to be easy for them."