Sticker shock at the supermarket: Food prices poised to rise

If there's any silver lining to a recession -- albeit a thin one -- it's that consumer prices typically go down. Make no mistake, deflation is a sign of a sick economy, but at least the net effect of cheaper prices for the basic necessities -- food, clothing and shelter -- helps folks get by when they are struggling to make ends meet.

But consumers should brace themselves for things to change, especially at the supermarket. As the global and U.S. economies emerge from the downturn, economists predict that there is going to be some sticker shock at the checkout line. Food prices, they say, are heading higher and when you combine that with an unemployment rate that's expected to linger near a three-decade high for at least another year, it's even more unwelcome news.
The U.S. Department of Agriculture expects overall food prices to rise as much as 4 percent in the U.S. by the end of 2010. Yet, some economists think they could climb by as much as 5 percent. Even using the government's more conservative numbers, the price for eggs is forecast to rise 3 percent and beef is seen increasing 2 percent. Lamb, seafood and fish? All three categories are expected to jump as much as 5 percent.

A 5 percent boost in your grocery bill may not seem terribly devastating, but consider this: If you spend $300 a week on groceries now, you'll need to squeeze a raise of about a thousand dollars a year out of your boss (don't forget withholding tax) just to keep up with higher chicken, beef, pork and dairy prices. Good luck accomplishing that little feat with a 9.8 percent unemployment rate and companies looking into every nook and cranny in order to cut costs.

No doubt it's frustrating to think that food prices will resume their long upward trend, but that's the reality of supply and demand in the global marketplace, economists say. After all, before the world economy fell off a cliff last year, food prices were soaring out of control thanks, in part, to growing demand from emerging markets like China and India and rising oil prices. From January 2007 to June 2008, global food prices rose 60 percent hitting an all-time high, according to the United Nations. (See chart)

This chart incorporates data from the 2007 and 2008 Food Outlook reports by the Food and Agricultural Organization of the United Nations. Author credit: Hugo Ahlenius/GRID-Arendal

Since that peak was hit, global food prices have retreated some 15%, meaning consumers are still paying about 45 percent more for food now than they were just two years ago.Bill Lapp, former chief economist at food giant ConAgra (CAG) and now president of Advanced Economic Solutions, a consulting firm in Omaha, Neb. that specializes in analysis of food costs, says at the peak of the global food crisis, food prices in the U.S. grew 6 percent. In 2010, he thinks they could jump 5 percent. Yikes.

"The challenge for next year will be the fact that pork, beef, chicken and dairy producers are all losing significant amounts of money," Lapp says. "As they reduce supplies, that will cause prices to rise. In 2008, cereal grains led food costs higher. In 2010, it will be meat and dairy."

Apart from the fact that food producers will need to raise prices in order to stay in business -- and appease shareholders -- there are global macroeconomic factors at play, too, says Michael Roberts, an economist at North Carolina State University. "Commodity costs [such as corn, soybeans and wheat] are coming up because traders are speculating that the recovery is coming," he says.

While it may not feel like it here at home, the giant economies of China and India -- not to mention other emerging markets in Asia and elsewhere -- are already starting to heat up. That increased demand will cause prices to rise -- in fact, you can already see it happening in the commodity markets, he says. (The classic Eddie Murphy film "Trading Places" illustrated this well: Yes, there really are people who profit from buying and selling pork bellies and concentrated frozen orange juice.) Meanwhile, the weak U.S. dollar means we will be exporting more of our homegrown food overseas, causing prices to rise at home.

Finally, let's not forget the impact of ethanol and other alternative fuels on food prices. The U.S. will enjoy record corn production in 2009, Lapp says, but more than a third of that will be diverted to ethanol production. And, unless Congress changes the Energy Independence and Security Act of 2007, the amount of corn going into our gas tanks will rise another 25 percent over the next five years. Cattle, chicken and hogs are fed corn and soybeans, meaning the folks who raise these animals will need to raise prices to pay their own higher feedstock bills.

Corn-based ethanol and soy-based biodiesel also has the effect of making these foodstuffs trade like energy. As crude and heating oil prices rise, so too do the prices of corn and soy in the marketplace -- as well as the cost to produce and ship the food. Corn prices have come down substantially during the recession, but as Lapp points out, they are still 50 percent above historical norms.

The end result? Consumers should keep an eye on oil prices, which not only impact what they pay at the pump but also what they pay at the checkout counter.
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