Food costs rise more than gas

Economists predict 3.7% increase could nearly double by end of year

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June 12, 2007|By McClatchy-Tribune

Rising gasoline prices have been getting all the attention, but the cost of another, more-important staple is actually rising more: food.

In the past year, food prices have risen 3.7 percent and are on track to increase as much as 7 percent by year's end. The current increase is more than double the 1.8 percent increase last year, according to the Consumer Price Index.

Meanwhile, gasoline prices rose 2.9 percent, with only the cost of health care rising more, and then just slightly.

While companies up and down the food chain see the increases, they're only beginning to pass them on to consumers.

Some consumers are tweaking their spending habits. A recent study shows that more consumers are using coupons. Consumer Marilyn Pearson, of St. Paul, Minn., just resorted to clipping them again, though she hasn't changed what she buys.

On a recent evening, her shopping cart was filled with collard greens, meat and other supplies for a barbecue. She's noticed the price of meat, some vegetables and dairy going up, but says, "You gotta eat, you gotta buy."

While food prices are rising pretty much across the board, items related to corn are affected the most. That's because increasing demand for ethanol, made from corn, is driving up corn prices, which farmers use to feed their poultry and cattle. The high price of corn also is affecting the price of cereal and other products, including foods manufactured using corn oil such as potato chips.

But corn is only one culprit. Higher labor, packaging and fuel costs all play a role. Bad weather in California and Florida was the main contributor to a 20 percent rise in citrus fruit prices as well as higher prices for some vegetables. A drought this summer could cause prices to rise even more than current projections.

"We should all hope we have a really good growing season this year," said Ben Senauer, co-director of the University of Minnesota's Food Industry Center.

Prices are rising in each grocery aisle. In April, eggs cost 18.6 percent more than a year ago. Whole chicken prices increased 7 percent. Bread is up nearly 6 percent and beefsteaks up 5.5 percent.

Senauer said many price increases haven't made their way to all stores yet, and many stores are absorbing the costs rather than passing them on to customers.

"Right now the margins are simply being squeezed," he said.

Michael Swanson, a Wells Fargo & Co. agricultural economist, predicts that food inflation will rise at a rate not seen since 1990, when prices ended the year 5.8 percent higher.

Consumers have responded to higher fuel prices by driving less, and economists predict that Americans similarly will tweak their food habits - reallocating some food dollars from eating out to buying groceries, choosing to eat less meat and cooking smaller portions to reduce waste.

In recent quarterly earnings conference calls, Target Corp., Supervalu Inc. and Hormel Foods Corp. each pointed to increased food prices as a factor to contend with. Target described food-price inflation as "fairly aggressive," and said it would need to fight it by increasing productivity at stores and distribution centers.

Supervalu expects corn prices to affect the year's overall inflation levels, although the company declined to say whether customers would see rising prices at its stores.

Hormel said the quarter's only disappointment was that its Minnesota subsidiary "Jennie-O Turkey Store was not able to pass on higher grain costs through pricing as quickly or as thoroughly as we had hoped." Hormel expects to increase prices further for the rest of 2007.

Because food is a category that consumers can't cut from their budget, it's the cups of coffee, the entertainment dollars, and the clothes-and-jewelry budget that are scaled back first. In April, retail sales fell 0.2 percent, the first decline in seven months, according to the Commerce Department. Yet consumer confidence rebounded in May, mainly because consumers take a cautiously optimistic view of business conditions.

Still, a stew of high gas prices, food costs, a slumping housing market and adjusting mortgages could be a recipe for trouble for strapped Americans with little wiggle room in their budgets.

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