High Cost of Food Hits Businesses and Consumers
Life + Money

High Cost of Food Hits Businesses and Consumers

Nick Bhardwaj/The Fiscal Times

All it takes is a trip to the local grocery store these days to know that some foods — bread, pasta, sugar and beef — are becoming household extravagances. And prices are expected to remain high for at least the next six months, fueling worries about a reprise of the 2008 global food crisis.

U.S. consumer food prices increased 1.5 percent last year and are expected to rise between 2 and 3 percent in 2011, according to the Bureau of Labor Statistics. A one-pound loaf of whole wheat bread cost 7 percent more in December than a year earlier, and a pound of ground beef was up 8.8 percent.

At the World Economic Forum in Davos last week, U.S. economist Nouriel  Roubini, known as “Dr. Doom,” and others warned that sharp rises in food and energy prices pose a serious threat to global stability.

“In emerging markets, it’s leading to rising inflation, a reduction in disposable income; it’s leading to riots, demonstrations and political instability,” Roubini told Bloomberg. “It’s really something that can topple regimes, as we have seen in the Middle East.”

In the summer of 2008, skyrocketing food prices sparked riots in more than 40 countries. Recent political unrest in Egypt, Yemen, Algeria and other Arab countries already has caused protests about food price increases and concerns about energy supplies. “If this spreads more widely it has the potential for generating volatility in fuel prices, which has correlated with volatility in food prices,” said Homi Kharas, senior fellow and deputy director for the Global Economy and Development program at the Brookings Institution, a Washington think tank.

Oil prices, which have been hovering at about $90 a barrel for several months, are still far below the 2008 peak of nearly $150. But oil experts forecast prices as high as $100 a barrel or more this year, a result of strong worldwide demand and the possibility of reduced supply, pushing up gasoline and heating oil prices in the U.S.

It’s not just consumers feeling the pinch. The cost to produce processed foods rose 4.9 percent last year. A spokesperson for cereal-maker General Mills said the company is “intensely focused on productivity initiatives to try to offset the input cost inflation … [which] helps us keep our products more affordable for consumers.” Restaurants spend about a third of what they take in on food and beverage purchases. Higher wholesale food prices can add pressure to reconfigure their offerings to avoid passing added costs to customers. “Most restaurants are hesitant to raise menu prices, especially during times of economic downturn,” said Annika Stensson, spokesperson with the National Restaurant Association. “Some menu price inflation might take place,” she added, noting that the “impact may vary by restaurant type.”

After the U.S. Department of Agriculture (USDA) slashed inventory forecasts for key crops several weeks ago, futures prices for corn and soybeans, used  as feed for cattle and chickens, soared to their highest levels in 30 months. U.S. prices for corn — the world’s single largest crop — jumped 5 percent to more than $6 a bushel. And soybeans rose 5.2 percent to $14.20 a bushel. The USDA predicts corn, soybeans and wheat prices will remain at historically high levels for the next decade.

It’s a question of supply and demand. As a new middle income class emerges in developing countries like China and India, more people have money to spend which pushes prices up, said Bruce Scherr, chairman and CEO of Informa Economics. “At the moment every economy in the world is growing ... You should get a price rebound out of that.”

The U.N.’s Food and Agriculture Organization (FAO) Food Price Index surged last month, slightly surpassing levels seen during the 2008 food crisis. The index — which covers the average price of food staples such as dairy products, meat and cereals —  was up 25 percent in December from the same time a year ago. 

The U.N. body, which measures commodity prices on the world export market, warned that the world faces a “food price shock” and needs to prepare for harder times ahead unless production of major food crops increases significantly in 2011. “There are many reasons not to be optimistic,” said Abdolreza Abbassian, FAO senior grains economist.

“We’ve got to have steady increases in productivity to meet the rise in consumption,” said Keith Collins, former USDA chief economist. “Right now that’s a neck and neck race. We have run down our stock levels.”

Agriculture experts say the similarities between the 2008 food crisis and now are striking but prices aren’t yet at panic levels. However, the global economic recovery will accentuate demand and possibly hold prices higher for longer than the 2008 spike, Collins said.

Some say there isn’t an immediate concern for a global food shortage but rather shortage of particular commodities, such as wheat. In August, a failed wheat harvest in Russia prompted President Vladimir Putin to ban grain exports until the end of the 2011 harvest. This along with subpar harvests in Ukraine, Kazakstan and Canada left a significant hole in the world’s wheat market. Investors responding to a Bloomberg survey in December said wheat prices could rise as much as another 16 percent this year.

Extreme flooding in Australia and excessively hot weather in Latin America have added pressure to increasing prices. “We are going to see a volatile situation, a little bit up and a little bit down between now and spring,” Abbassian said. “The market is going to remain very agitated throughout summer and well into the harvest period before we get any direction out of it.”

But not everyone is hurt by higher food prices. Cargill, the world’s biggest trader of raw foodstuffs, tripled its profits in the second quarter of its fiscal year. Cruise operator Royal Caribbean International — which serves approximately 53 million pounds of meat a year — still managed to post a 55 percent jump in its third-quarter earnings as demand improved.

Related Links:
The Consequences of Costly Nosh (The Economist)
Roubini Says Jump in Food, Energy Prices ‘Can Topple Regimes’ (Bloomberg)
In Global Land Rush, A Search for Fair Returns (Reuters)