Brace Yourself, Higher Food Prices are Here to Stay

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Food prices are primarily governed by the cost of commodities — the raw materials or products that are bought and sold commercially in large quantities like oil, corn, cotton, coffee and wheat. And during the last six months, commodity prices have experienced record gains.

Additionally, Federal Reserve Chairman Ben Bernanke’s expansion of the FED’s asset-purchase program has sent commodity-related stocks much higher, as investors seek a hedge against inflation, and currency devaluation.

The price of crude oil has also increased — hovering near $90 a barrel, and since oil is the life blood of all economies, its price affects the price of all other agricultural commodities, as well as the cost of food transport reflected in gasoline prices.

Commodity Prices Explode in Summer and Fall

Cocoa, Corn, cotton, coffee, sugar, wheat, and soybeans — among other items– saw prices skyrocket during summer months and beyond. The uncharacteristically abrupt rise in grain prices began in the summer as unusually hot weather damaged crops worldwide. Floods in Pakistan destroyed wheat crops, and a drought in Russia forced the government to ban wheat exports.

Cotton hit $1.52 per pound in November. In October, a bushel of corn averaged $4.78, up from $3.61 last year, and wheat bushel prices leaped to $6.08 from $4.47 last year. And when grain prices increase, the higher price in feed forces meat and diary prices to go up. USDA figures show that pork has risen 13 percent from a year ago; butter is up 25 percent, and milk has risen 6 percent. There’s also been an increase in goat and lamb prices.

Because there are so many forces that impact agricultural commodities prices — supply and demand, weather, technological innovation, inflation, low or high inventory levels — the market in commodities is extremely volatile. Early in November, commodity prices tumbled. The Thomson Reuters/Jefferies CRB Index, an index of 19 raw materials, dropped almost 4 percent on November 12 and fell another 2.5 percent on November 18. But commodity prices are on the rise again.

Hog futures are up as well as cocoa, sugar, coffee, and orange juice. Last week, cocoa saw its biggest weekly gain since mid-July. Rice also saw its biggest weekly gain since 2009 on world supply concern. Analysts claim global demand for rice will outpace supplies as bad weather has reduced production in Asia and the U.S.

There was also reduced grain production in some areas of the U.S. American farmers produced less corn this year, and because an increasingly larger percentage of the world’s corn harvest is used to make ethanol, strong demand will keep grain prices higher. Add that to the increased demand for grains worldwide from the emerging legions of middle-class families in China, India, and other developing nations, and higher food prices — though they may fluctuate — are here to stay indefinitely.

“For most of your life, there were surpluses of most of the agricultural products in the United States and Europe,” said Donald Coxe, chairman of Coxe Advisors in Chicago. “We don’t have that anymore,” he said.

According to the United Nations Food and Agriculture Organization, global food prices rose 3.6 percent in November to within reach of the peak of the 2007-08 crisis.

Price Inflation Lag Time

Since commodity prices have skyrocketed, wholesale prices have increased; and although popular retailers have absorbed some prices increases, they have also used price masking gimmicks to surreptitiously compensate for increased costs by shrinking serving sizes while maintaining the old price, steering consumers away from buying generic brand foods.

Simon Black calls these price masking gimmicks “value deflation” — where restaurants and retailers reduce portions so customers aren’t paying more, but they’re getting less for their money. At the retail level, says Black, value deflation is the bigger trend over price inflation, and CPI numbers don’t track eroding value. “This gives western bureaucrats plenty of room to argue that inflation is not a concern at the moment, which they often do.”

Some media outlets contend grocery store prices have remained subdued, and that in the past year, the federal Consumer Price Index for food has gone up only 1.4 percent. But supermarket prices have been rising for the last 6 months and are not reflected in the CPI because the index uses information from previous years to create a basket of products, goods and services to calculate monthly price changes.

“If a product-x that was sold in a 20 ounce package for $3.99 back in 2007 is now being sold in an 18 oz. package at the same price, CPI does not compute that there was an 11.1% inflation in the price of product-x. Rather, according to the CPI, there was zero price inflation in product-x—because it sold for the same price, regardless of whether the package was 10% smaller.”

General Mills, the maker of Cheerios, Chex and Wheaties, began raising cereal prices last month. The increase will affect about 25 percent of its cereal production. Prices for some baking mixes are set for an increase effective Jan. 3. The company’s product lines include Betty Crocker, Bisquick and Pillsbury.

“While General Mills may be the first of the large food companies to really press higher on pricing, we believe many others may follow,” said Christopher Growe, a Stifel Nicolaus & Co. analyst. “It’s just a matter of time, given what is coming down the pike in the way of inflation.”

Kroger also announced it will be raise prices, as well as McDonald’s, Safeway, and Domino’s. Jake Weber, editor of The Casey Report, observes that “on average, our basic food costs have increased by an incredible 48% over the last year, measured by wheat, corn, oats, and canola prices.

The National Inflation Association recently announced the release of its report about NIA’s projections of future U.S. food price increases due to the massive monetary inflation being created by the Federal Reserve’s quantitative easing. The report was written by NIA’s President Gerard Adams, who believes food inflation will take over in 2011 as America’s greatest crisis.

Global Warming Could Raise Prices by 130 Percent

And if all these food inflationary revelations weren’t enough, a study by the International Livestock Research Institute concludes that if temperatures continue to rise, maize prices could increase by 131 percent within the next 40 years. And The Intergovernmental Panel on Climate Change claims a temperature increase of 3.6 degrees Fahrenheit, would have a dramatic impact on food prices.

UPI reports that Phillip Thornton, a lead author of the ILRI report, told the United Nations’ humanitarian news agency IRIN that it was important that negotiators at a climate summit in Cancun, Mexico, come to grips with the potential catastrophic effects of global warming. “(We wanted) … to get countries in Cancun to take action now to keep the global temperature increase below 2 degrees Celsius by the turn of the century,” he said. “Otherwise we are headed toward a 4-degree rise if greenhouse gas emissions remain unchecked.”

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