Food prices likely to keep rising

November 28, 2008|By New York Times News Service

For more than a year, food manufacturers have been shaving package sizes and raising prices, declaring that they had little choice because of unprecedented increases in the cost of raw ingredients like corn, soybeans and wheat.

Now, with the price of grains and other commodities plunging, it may seem logical that grocery prices will follow. But while some grocery items like milk and fresh produce are dropping, the prices of most packaged items and meat are holding firm or increasing. Experts warn that consumers should not expect lower prices any time soon on most items at the grocery store or in restaurants.

Government and industry economists project that the overall cost of food will continue to climb next year, led by increases for meat and poultry. A big reason, they say, is that food companies have not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this year.

The Agriculture Department is predicting that food prices will increase 3.5 percent to 4.5 percent next year, compared with an estimated 5 percent to 6 percent increase by the end of this year.

Some economists project even steeper increases next year. For instance, Bill Lapp, principal at Advanced Economic Solutions in Omaha, Neb., said he expected food prices to jump 7 percent to 9 percent next year.

"For the last 21 months, food manufacturers, restaurants and livestock producers have been absorbing significant costs that, in my view, are likely to be passed on to consumers in 2009 and beyond," said Lapp, a former chief economist at ConAgra Foods.

While predicting future food prices is an inexact science, data released by the Labor Department last week suggested the forecasters might be right.

Overall consumer prices recorded the biggest drop in the history of the Consumer Price Index, but food prices continued to inch upward, albeit at a slower pace than in previous months. The CPI showed that grocery prices rose 0.1 percent in October.

Some of the more visible items on grocery shelves, including produce and dairy products, dropped sharply in recent weeks, but not enough to offset the general trend of rising prices. Restaurant prices rose 0.5 percent in October.

Commodity prices began climbing rapidly in the fall of 2007, and food companies were hit hard by the increases. They tried to slow eroding profit margins by cutting operating costs, making packages smaller and raising prices.

Some companies, such as Kellogg's and Heinz, have managed to offset the higher ingredient costs and post robust profits by using shrewd commodity hedges and by raising prices without losing many customers. They also benefited from a trend of consumers eating out less and buying more groceries.

But other food companies have struggled. Hershey's, for instance, locked in high cocoa prices this year only to see prices drop this fall, analysts say. And meat and poultry companies have been hit by higher feed costs and a limited ability to charge higher prices, at least in the short term.

Now, even though ingredient costs such as corn and wheat have dropped, meat and poultry providers say they have still not raised prices enough to cover their increased costs. And packaged-food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins.

Michael Mitchell, a spokesman for Kraft Foods, said the company's food ingredient costs this year were running $2 billion higher than in 2007, a 13 percent increase, but that the company had raised its overall prices by 7 percent.

William P. Roenigk, senior vice president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand. "The time is coming when we're going to see a very significant increase in the retail price of chicken," he said.

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