June 29, 2008

Food Prices Are Going Up Fast. The Reason? Start With Corn.

By Patrick Garmoe, Duluth News-Tribune, Minn.

Jun. 29--The $3-a-dozen sign for fresh eggs at the Rice Lake Township farm tells the tale.

"I just upped our price," from $2.50, Patty Prudden said. "Even at $3 a dozen, I'm basically giving them away."

The weekly 50-pound bag of feed for her family's 40 chickens cost $12.95 in May. Now it's $15.

She also enjoys giving her eggs away for free, but the good will is getting expensive.

Things aren't looking much better at Super One Foods stores.

"We just received notification ... that the wholesale cost of milk is up 24 cents a gallon as of Monday, June 30," Bob Halvorson, vice president of operations for Miners Inc., owner of the 24 Super One stores, said a couple of weeks ago. Though the chain will try to absorb some of that, customers will have to pay more per gallon as well, he said.

At Fitger's Brewhouse and Burrito Union, menu prices rose 6 percent on average this month, because wholesale prices the restaurants pay have increased so much over the past year that the businesses were losing money at the end of 2007, said Tim Nelson, co-owner of the two restaurants.

"The economy hasn't been this way. This is a new thing for us," he said, after 12 years in the restaurant business.

"It's only a few pennies, but when you start adding up all those pennies, it can make a big difference," Nelson said.

Whether purchasing edibles from the farm or grocery store, or dining out, the consumer price index for food jumped by an above-average 4 percent last year, and is expected to rise 4.5 percent to 5.5 percent this year -- and much more in certain categories. Food prices increased 3.4 percent in 2004; 2.4 percent in 2005; and 2.4 percent in 2006.

While increasing demand for food from developing nations such as India and China is partly to blame, many of the recent increases are tied to increasing demands for corn, recently exacerbated by the loss to flooding of an estimated 1 million acres of planted corn -- about 150 million bushels -- across the Midwest.


"Corn is at the very center of our food system," said Benjamin Senauer, professor of applied economics for the University of Minnesota's Food Industry Center.

Corn is funneled into hundreds of products and animals that ultimately end up on Duluth's dinner tables, as well as into items such as sweeteners, soda, cooking oil and chewing gum.

The meats you eat come from cattle, hogs and chickens fed on corn.

That's why when the price for corn increases, it causes a chain reaction of price bumps throughout the grocery store -- and that's why Senauer is predicting higher prices this fall, and throughout next year.

"Where we're going to most see it is in beef, pork, poultry, eggs, dairy," predicted Michael Swanson, an economist for Wells Fargo in Minneapolis.

Even though prices for cattle and hogs are at record levels, the farmers still won't be making money, because it costs so much for the corn to feed the hogs, Swanson said.

Ethanol companies quickly are becoming major buyers in the corn market, economists said.

The price of corn is determined by the biggest user, and until recently, that group was always livestock producers, said Darrel Good, a professor of agricultural economics at the University of Illinois.

Ethanol this year is projected to consume 3.1 billion bushels of corn, or 24 percent of total corn use in the U.S., federal Department of Agriculture Chief Economist Joseph Glauber said during testimony in front of a joint congressional committee in May.

"Clearly, the thing that started the price rise was the number of ethanol plants going online," Good said.

Even before the flooding, the late spring planting led to expectations the corn crop would be smaller than normal.

"The last thing we needed this year was a short, bad crop. We needed a bumper crop, and that's not what we're going to get," Senauer said.

Last year's total crop stood at 13 billion bushels. The estimate for this year stands at 11.7 billion bushels, Senauer said.

And because a cold and wet spring often means a dry summer, economists are worried the crop might shrink some more.

"We do need a good July, a good August and a good September," Good said.

He anticipates prices for corn will go down, but not until this time next year.

"I don't think we can support prices at this level for an extended period of time," Good said.

But high corn prices piggyback on high gas prices, squeezing margins for food processors and grocery stores.

"A lot of food companies have let their margins really shrink, and have not really passed on the full price, the full cost increases they're seeing," Senauer said.

Like airlines, grocery stores don't have a lot of wiggle room left in their margins, so some of the costs must be pushed on to consumers, he said.

"You try to hold it down to a point you don't totally shock your customer," said Miners Inc.'s Halvorson.


"It's not that I can't buy it, but it irks me," grocery shopper Lempi Mattson of Carlton said of recent price increases.

Like Mattson, many shoppers in Northeastern Minnesota lament the escalating grocery store prices, but don't worry about going hungry, as is happening in some third-world countries.

Most Americans spend only about 10 percent of their budget on food, economists said.

The problem is for lower-income people who routinely already spend a quarter or more of their budget on groceries, Senauer said.

And Good said despite the inflation in food, it's still far short of the almost 15 percent spikes in 1973 and 1974.

And for now, eggs still are selling at the Prudden farm for $3 a dozen.

But there's no guarantee how long that deal will remain.

PATRICK GARMOE can be reached at (218) 723-5229 or [email protected]


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