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With a Midwest Drought, Rising Food Prices Hit Small Businesses

TIANLIN, CHINA - MAY 12: A villager looks at the parched paddy on May 12, 2012 in Tianlin county, Guangxi Zhuang autonomous region of China. A lingering drought has dried up most of rivers as high temperature and little rainfall over the past three months this year. Tianlin county had suffered from severe drought over the past three years.
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TIANLIN, CHINA - MAY 12: A villager looks at the parched paddy on May 12, 2012 in Tianlin county, Guangxi Zhuang autonomous region of China. A lingering drought has dried up most of rivers as high temperature and little rainfall over the past three months this year. Tianlin county had suffered from severe drought over the past three years.

This story originally appeared on The Grio.

As the worst drought in decades grips 26 U.S. states, business owners in affected areas and beyond are growing concerned about what it could mean for their bottom lines.

Farming areas in the grain belt have been hit with scorching temperatures and extreme dryness, which have damaged crop production and sent corn prices surging about 45 percent in the past two months. Soybean and wheat prices have also seen large jumps. Such an increase is likely to impact the costs of everyday food items, from breads to meat products that come from grain-fed animals. “Corn prices, in particular, are likely to feed through into a whole host of processed food prices, including various animal proteins, as well as anything using corn syrup sweeteners,” economists at Bank of AmericaMerrill Lynchwrote.

The drought is not expected to trigger an increase in consumer food prices for another two to three months, according to Richard Volpe, a research economist at the USDA. Still, that potential rise is already worrisome for business owners like Aliyyah Baylor, who co-owns Make My Cake bakery in New York City’s Harlem. Baylor says she has seen a small rise in prices for items like eggs and flour recently, and is concerned that it could get worse. “I would hope and pray that [the increases] don’t drag out to the holiday months and that it doesn’t affect anything else. We’re just hearing about flour, but what else is going to be affected long term?” asks Baylor.

Across the country in Oakland, California at Picán Restaurant, Michael LeBlanc is most concerned about how the drought might affect some of the meat items on his menu, particularly popular chicken dishes. LeBlanc says he’s bracing for the next six to eight months to be tough ones.

“The key variable in this drought is corn. Rising feed prices could affect every meal that we have, “ explains LeBlanc. He describes Picán’s menu as Southern fusion that combines traditional comfort food with flavors from all around the world. LeBlanc says Picán’s offerings are unique in the Oakland area and he is determined to keep his menu’s core items regardless of how costs may fluctuate. “The priority is maintaining the integrity of what we put on the plate,” says LeBlanc.

For both Baylor and LeBlanc, increasing menu prices is the one potential drought side effect they most hope to avoid. And both are already considering strategies to keep from passing on any rising costs to their customers. With Make My Cake set to celebrate its sixteenth anniversary this year, Baylor says that remaining community oriented is part of what makes her business successful. She is especially sensitive to the economic situation of residents in the bakery’s vicinity. “Being centered in a neighborhood where employment is fluctuating means that we can’t afford to raise our prices because we don’t want to scare the client away, ” she says.

Instead, Baylor is implementing measures like renting out party space in the bakery to generate additional revenue. Similarly, LeBlanc notes that he is boosting efforts to source corn-based products locally. He says that since Oakland-area suppliers have been mostly unaffected by drought conditions, buying locally is one way of hedging against higher costs.

In its most recent estimates, the USDA predicts food prices will rise 2.5 to 3.5 percent this year and 3 to 4 percent in 2013. Baylor and LeBlanc thus remain vigilant and continue to monitor developments around the drought closely. “It’s something that will make us more cautious,” says Baylor.

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

This article was originally posted at theGrio business.

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