August 24, 2008
Food Inflation: Commodities Slump Won’t Mean Lower Grocery Prices
By Stevenson Jacobs Associated Press
NEW YORK -- As prices for crude oil and other commodities ease, consumers have gotten a small dose of relief at the gas pump. But don't expect less pain at the grocery counter.
Food inflation is here to stay -- and will probably get worse for some things.
That's because retail prices for cereal, eggs, cheese and meat generally lag by several months or longer world prices for wheat, corn and soybeans -- the raw ingredients of so much of our food. Some food items may come down modestly as commodities prices cool off; others might not budge a cent and some may actually increase.
"Food prices tend to go up pretty quickly, and they tend to stick on the way down," said Jim Sartwelle, an economist with the American Farm Bureau, which tracks retail food prices on a quarterly basis.
That's bad news for Americans still struggling with high costs for fuel and household goods, and worse for people in impoverished countries like Haiti and Senegal, where violent food riots broke out earlier this year as world food prices peaked.
In the United States, retail food prices have jumped on average 6 percent this year -- triple the normal inflation rate of around 2 percent -- as soaring demand for grains coupled with severe weather around the globe battered crops and sent world prices for rice, flour and other staples soaring.
Food manufacturers have dealt with the higher input costs in a variety of ways, from raising retail prices to shrinking boxes of cereal and bags of potato chips so they can sell less product for the same price.
But while easing prices for crude and other commodities has allowed retail gas prices to come down almost 10 percent from July highs, food prices have been more stubborn.
The economics of the food business are partly to blame. Though crude oil is the main ingredient of gasoline, processed foods like cereal, crackers or cookies use only a small amount of corn, wheat and other grains, limiting manufacturers' pricing power.
"Basically, there's only a few cents worth of corn in a box of corn flakes, so food prices are much slower to react to the downside than energy prices, " said Richard Feltes, senior vice president and director of commodity research for MF Global in Chicago.
Another factor keeping food prices high: Though commodities prices have fallen from record levels, they're still well above historical levels. Corn and soybeans have dropped 24 percent and 17 percent, respectively, in the last two months but are still about double where they were two years ago.
"As long as we're in this world of expensive oil and commodities, the prices that you're seeing now in the grocery shelves are not going away," said Ephraim Leibtag, an economist with the U.S. Department of Agriculture who tracks retail food prices.
It's a similar story in poor countries around globe. While the price of rice -- a staple consumed by half the world's population -- has fallen 32 percent from record levels reached in April, the savings there and for other foods have yet to come down to year-ago levels. In Ethiopia, for example, food prices at local markets are still three times higher than last year, said World Food Program spokeswoman Brenda Barton.
"We can't even buy there," said Barton, who added that rising food and energy costs have almost doubled Rome-based WFP's annual budget to feed hungry people, from $3.1 billion to $6 billion.
"It means (food inflation) isn't a temporary problem. It's not going away," Barton said.
Looking ahead to next year, economists see a mixed bag for American consumers. While falling grain prices should slow the rate of increases for baked goods, the USDA's Leibtag says people can expect to pay more for other items like beef, pork and chicken.
That's because as grain markets took off, the cost of corn- and soybean-based animal feed skyrocketed. Now, livestock owners -- who spend half or more of their production costs on feeding their animals -- have had to thin the size of their herds and flocks to deal with the increases. Cow slaughter has jumped 22 percent over last year, while hog slaughter is up 10 percent.
Much of that meat has gone into freezers to handle excess supply, but as the inventory dwindles, livestock owners won't have the money to replenish their herds to meet demand.
"That's going to have some serious consequences at the retail level," said Jesse Sevcik, vice president of legislative affairs at the American Meat Institute. "The only thing left is for prices to go up."
Expensive animal feed has also battered poultry producers, who so far have resisted passing on those costs to consumers to safeguard chicken's image as a good value compared to ribeye steaks and pork chops. But that's about to change, said Bill Roenigk, senior vice president of the National Chicken Council.
"From a consumer standpoint, more and more of these feed costs are going to be passed on, and that means higher prices at the supermarket," said Roenigk.
Falling grain prices have taken some pressure off producers, he said, but not enough.
"We won't have to pass on $8-a-bushel corn, but we will have to pass on $6 corn," Roenigk said. "Food inflation certainly is not over."
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