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Commodity price slump unlikely to lower food prices

Recent slumps in commodity prices have been linked to declining prices for gasoline, but financial analysts south of the border are forecasting the exact opposite for prices at the grocery store as 'food inflation' continues.  


August 21, 2008
By Associated Press/Toronto Star

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August 21, 2008

NEW YORK–As prices for crude oil and other commodities come down, consumers have received 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 behind world prices for wheat, corn and soybeans – the raw ingredients of much of our food. Some items may come down modestly as commodities prices ease: others might not budge and some may 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 consumers still struggling with high costs for fuel and household goods. Retail food prices have jumped an average six percent this year – triple the normal inflation rate of around two 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 makers have dealt with higher input costs in a variety of ways, from raising retail prices to shrinking packaging so they can sell less product for the same price. But while easing prices for crude and other commodities have allowed retail gas prices to 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 past 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 food prices.


Looking ahead to next year, economists see a mixed bag for consumers. While falling grain prices should slow the rate of increases for baked goods, 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. 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.


"That's going to have some serious consequence 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 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."