Rising Corn Prices Will Soon Mean Fatter Meat Prices

The government may have reported a core inflation rate for September that barely budged from August, but there's still bad news for consumers at the grocery store: A spike in corn prices will probably lead to higher meat prices soon.

The price of corn has shot up 8% during the week of Oct. 11 alone, bringing the total rise to close to 50% in the last three months. The sharp increase came after the Department of Agriculture issued a forecast for corn production that was 4% lower than the forecast it had issued in September. That would put the crop at 12.7 billion bushels, about 3% less than last year's crop.

Most of the corn is used for animal feed, so it's an important component of beef and pork prices (and, of course, ethanol).

Food Costs Are Creeping Higher

Darrel L. Good, a professor agriculture and consumer economics at the University of Illinois, says cattle and pig farmers can't pass those price increases along, so they're cutting back their herds. "That eventually shows up as smaller supplies at the retail level, and smaller supply speaks to higher prices," Good says.

That's an extra burden consumers don't need. The Bureau of Labor Statistics said Friday that the consumer price index had increased only 0.1% in September. But the food component rose 0.3% after a 0.2% increase in September, thanks to higher wheat prices caused by a drought in Russia.

The price index for meat, poultry, fish and eggs rose the most, increasing 0.9%, with eggs up 7.2%. In all, food prices are up 1.4% in the past 12 months.

More Pressure on Prices Is Coming

Ephraim Leibtag, an economist with the U.S. Department of Agriculture's Economic Research Service, says more bad news is coming. The USDA is forecasting that beef prices will rise 2.5% to 3.5% next year, while pork is expected to go up 3% to 4% and dairy products will face a 3.5% to 4.5% increase. Those forecasts don't even take into account corn's latest jump in price.

"Overall food price inflation year-over-year is still relatively low, but I think the trend is turning around now as commodity prices rise," Leibtag says. "If commodities were to increase or even settle at a higher rate than they've been at the last couple of years, that would put additional pressure on food prices in the upcoming year."

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Gary Rodkin, chief executive of ConAgra Foods (CAG), a sprawling Midwestern food producer and maker of such items as Banquet frozen dinners and Peter Pan peanut butter, agrees that rising grain prices mean consumers will soon face higher prices at the grocery store. "Within months, you will start to see prices creep up," Rodkin told Reuters.

The USDA calculates that a 50% increase in corn prices -- roughly what has taken place in the last three or four months -- would raise overall food prices by less than 1%. That's because the corn isn't a direct cost to consumers. Rather, it goes through a chain of feed, cattle and wholesale meat prices before hitting the retail level.

"We'll Be on Edge"

The University of Illinois's Good says the actual corn crop isn't that much smaller than previous years'. Still, prices spiked because the expectations had been for a much larger crop this year. "It turned out to be smaller than expected, but it's not really a failure or a disaster," Good says.

In addition to increasing demand for corn from biofuels like ethanol, U.S. exports of corn have jumped, thanks to grain shortages in places like Russia, where this year's crop was sharply curtailed by a drought.

"Next year, we need the U.S. and the world to have pretty good crops, or this thing could worsen," Good says. "We'll be on edge until we see how the crops develop over the next year."

Meantime, American meat-eaters better bring a little more cash when they hit the butcher shop.