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  • From: "Tradingpost" <tradingpost@lobo.net>
  • To: livingontheland@lists.ibiblio.org
  • Subject: [Livingontheland] Food Prices Expected to Keep Going Up
  • Date: Tue, 10 Feb 2009 10:51:22 -0700


Food Prices Expected to Keep Going Up
http://www.nytimes.com/2008/11/27/business/27food.html

By ANDREW MARTIN
Published: November 26, 2008

For more than a year, food manufacturers have been shaving package sizes
and raising prices, declaring that they had little choice because of
unprecedented increases in the cost of raw ingredients like corn, soybeans
and wheat.

Now, with the price of grains and other commodities plunging, it may seem
logical that grocery prices will follow. But while prices for some items
like milk and fresh produce are dropping, those of most packaged items and
meat are holding firm or even increasing. Experts warn that consumers
should not expect lower prices anytime soon on most items at the grocery
store or in restaurants.

Government and industry economists project that the overall cost of food
will continue to climb in 2009, led by increases for meat and poultry. A
big reason, they say, is that food companies still have not caught up with
the prolonged run-up in commodity prices, which remain above historical
averages despite coming down from their highs early this year.

The Agriculture Department is forecasting that food prices will increase
3.5 to 4.5 percent in 2009, compared with an estimated 5 to 6 percent
increase by the end of this year.

Some economists project even steeper increases next year. For instance,
Bill Lapp, principal at Advanced Economic Solutions in Omaha, said he
expected food prices to jump 7 to 9 percent next year.

“For the last 21 months, food manufacturers, restaurants and livestock
producers have been absorbing significant costs that in my view are likely
to be passed on to consumers in 2009 and beyond,” said Mr. Lapp, a former
chief economist at ConAgra Foods.

While predicting future food prices is an inexact science, data released by
the Labor Department last week suggested the forecasters might be right.

Overall consumer prices recorded the biggest drop in the history of the
Consumer Price Index, but food prices continued to inch upward, albeit at a
slower pace than in previous months. The C.P.I. showed that grocery prices
rose 0.1 percent in October.

Some of the more visible items on grocery shelves, including produce and
dairy products, dropped sharply in recent weeks, but not enough to offset
the general trend of rising prices. Restaurant prices rose 0.5 percent in
October.

Commodity prices began climbing rapidly in the fall of 2007, and food
companies were hit hard by the increases. They tried to slow eroding profit
margins by cutting operating costs, making packages smaller and raising
prices.

Some companies, like Kellogg and Heinz, have managed to offset the higher
ingredient costs and post robust profits by using shrewd commodity hedges
and by raising prices without losing many customers. They also benefited
from a trend of consumers eating out less and buying more groceries.

But other food companies have struggled. Hershey, for instance, locked in
high cocoa prices this year only to see prices drop this fall, analysts
say. And meat and poultry companies have been hit by higher feed costs and
a limited ability to charge higher prices, at least in the short term.

Now, even though costs for ingredients like corn and wheat have dropped,
meat and poultry providers say they still have not raised prices enough to
cover their increased costs. And packaged food manufacturers are unlikely
to lower prices because commodity costs remain relatively high and they are
still trying to rebuild eroded margins.

Michael Mitchell, a spokesman for Kraft Foods, said that the company’s
food ingredient costs this year were running $2 billion higher than in
2007, a 13 percent increase, but that the company had raised its overall
prices by only 7 percent.

William P. Roenigk, senior vice president and chief economist for the
National Chicken Council, said his industry had been losing money for more
than a year. Chicken producers are now trying to recover those costs by
reducing production, which will eventually alter the balance between supply
and demand. “The time is coming when we’re going to see a very
significant increase in the retail price of chicken,” he said.

The restaurant industry, which has been battered by a sharp drop in
customers, also says it has not been able to raise prices enough to keep
pace with the cost of ingredients.

People in the restaurant business said they did not like raising prices
during an economic downturn. “If anything in this environment, one would
be looking at the ability to offer much greater emphasis on value pricing
in restaurant menus,” said Hudson Riehle, chief economist of the National
Restaurant Association. “In contrast, exactly the opposite is happening.
Our operators are being forced to raise menu prices at the highest rate
since 1990.”

Predictions about food prices are subject to change because commodity
prices are unpredictable. Ephraim Leibtag, an economist for the Agriculture
Department, said food inflation would slow by the middle of next year if
commodity prices remained low. “Right now the forecast is about 4
percent, but that would be lowered if we do not see any surge in commodity
costs over the next few months,” he said.

A reason that overall food prices are expected to continue increasing is
the lag between price increases for basic commodities and for finished food
products in the grocery store, particularly for meat and processed foods.
Consider the price of corn, an ingredient in things like cereal and breaded
shrimp. It was not too long ago that corn hovered around $2 or $3 a bushel.

But corn prices began climbing last fall and peaked around $8 a bushel in
June. They have since dropped to about $3.50 a bushel, still above the
historical norm. Some food manufacturers locked in prices for corn and
other commodities in the spring and summer, fearing that prices could go
even higher. But prices fell instead, and they are now stuck with the
higher prices until their contracts expire.

When costs go up for livestock producers, they are often unable to
immediately raise prices because those prices are set on the open market,
which is dictated by supply and demand. Instead, they begin reducing the
size of their herds or flocks, which eventually leads to less meat on the
market and higher prices. But reducing livestock production can take months
to years, and in the interim it can actually suppress prices as breeding
animals are slaughtered to reduce production.

The prospect of more food inflation is inflaming a debate over its causes.
Many food manufacturers and economists maintain that one culprit is
government policies promoting the use of ethanol fuel made from corn.

About a third of the corn crop is used for ethanol, putting ethanol
producers in competition with livestock farmers and food manufacturers. The
result, they contend, is that prices for corn are now higher and more
volatile.

“The connection of oil prices to agricultural commodities is new as of
2007, and it’s a major game changer for those in the food production
business,” said Thomas E. Elam, president of FarmEcon, a consulting firm.

But ethanol advocates counter that the food industry’s arguments have
been proved false, saying that corn prices have declined as ethanol
production is increasing. Matt Hartwig, spokesman for the Renewable Fuels
Association, an ethanol industry group, said food companies were “very
quick to tell the American public that they had to raise food prices
because corn was so expensive, and that the reason corn was so expensive
was corn-based ethanol.”

Mr. Hartwig added: “Now, clearly, we know that relationship doesn’t
exist. If ethanol isn’t the reason, what is the real reason for food
prices going up?”





  • [Livingontheland] Food Prices Expected to Keep Going Up, Tradingpost, 02/10/2009

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