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Analysts: No Price Relief in Sight: Weather, Demand Are Factors in Higher Costs

July 6, 2008

By James Mayse, Messenger-Inquirer, Owensboro, Ky.

Jul. 6–INCLEMENT WEATHER WORLDWIDE — including recent flooding in the Midwest and a cyclone that struck southeast Asia earlier this year — is causing sticker shock at U.S. groceries, as people experience rising prices for milk to bread and vegetable oils.

But high food prices are caused by more than just a recent spate of bad weather.

And that means the increases are more than just a temporary spike.

Instead, the University of Kentucky Department of Agriculture predicts food prices will remain high for more than a year. Meanwhile, UK agricultural economist Lee Meyer said supermarket prices for beef will eventually increase, as the cattle industry begins to grapple with the high cost of grain.

Will Snell, a UK agricultural economist, said analysts were already expecting consumer food prices to increase by about 5 percent or 6 percent this year. But the recent flooding in the U.S. corn belt states, coupled with continued competition for grain, could push price increases above 6 percent.

UK economist Larry Jones said food prices could climb by 7 percent or 8 percent this year. He does not expect food prices to decrease “for the next year and a half to two years.”

If there is “blame” for high food prices, it stretches in multiple directions.

Years of drought in Australia crippled that nation’s wheat and rice crops. While the Australian drought shows signs of lifting this year, the cyclone that devastated parts of Myanmar cost that country much of its rice crop. Instead of exporting rice, Myanmar will likely have to import rice to meet domestic demand.

Corn prices have been elevated in the U.S. because of fierce competition between food manufacturers, livestock producers who feed corn to cattle and hogs and the expanding biofuels industry. So corn prices were already jumping before flooding destroyed cornfields from Indiana to Iowa.

The weak U.S. dollar means foreign countries are able to purchase more American products — causing exports of U.S. grain to increase. The upward bump in exports comes at a time when China’s economy is booming, and Chinese citizens are demanding better diets and American food imports.

And then there’s the rising cost of fuel. Transporting food is simply more expensive than it used to be, but high fuel prices also cost farmers more to plant, fertilize and harvest their crops. Eventually, those costs had to be passed along to consumers.

Jones said the store price of cereals and bakery goods has increased 10.5 percent over the last year. Dairy products have risen 11 percent, and the price of vegetable oils and fats has risen 12.8 percent.

While the increase in biofuels production, such as ethanol and biodiesel, has affected food prices, it has played a relatively small role, analysts said. The U.S. Department of Agriculture estimates corn can be found in less than 10 percent of foods sold in U.S. stores. In fact, less than 10 percent of the U.S. corn crop is used as ingredients for domestic food products.

Since grain is fed in large quantities to cattle, it seems logical to assume that beef prices would be rising at the supermarket as well. But, for the most part, that hasn’t happened yet, because the beef industry has been able to avoid profit losses thus far.

Feedlots, which prepare cattle for slaughter by feeding them grain, are paying the high cost of corn. But feedlots are also able to charge more when they sell cattle for slaughter, so they’re able to purchase cattle from farmers for about the same price they paid last year.

“The people who are selling slaughter cattle, their income is up $150 to $200 per head,” Meyer said. “But their feed price is up about the same.”

The result, Meyer said, is a wash, with the profits from slaughter cattle sales offsetting grain prices. That balance will be difficult to maintain over the long run, Meyer said.

Factors such as supply and the cost of corn production will keep corn prices high, while Meyer sees the profit feedlots are receiving for slaughter cattle as a short-term phenomenon. When beef prices eventually increase, “there will be a consumer response,” as people cut back their beef consumption, Meyer said.

But for now, feedlots are breaking even, and cattle producers are earning only a dollar or two less per head for feeder cattle compared to last year. As long as that balance remains in place, cattle producers can avoid changing their operations to make pasture a larger part of their herds’ diets.

“It’s not happening as quickly,” Meyer said of the switch from grain to pasture. “We’re … on the edge of maintaining a fragile system. When slaughter prices come down and feedlots lose money, more pieces will be in place for farmers to look for alternate (feeding) systems.”

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Copyright (c) 2008, Messenger-Inquirer, Owensboro, Ky.

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