Suddenly, Corn Costs More. Why Not Corn Flakes?

toggle caption Danny Johnston/AP

For months, prices paid to farmers for corn, wheat and soybeans have been shooting up. But so far, grocery prices have held steady for consumers.

The reason is largely a matter of lag time. Crop prices have jumped so quickly since June that the changes haven't made their way -- yet -- through the retail pricing pipeline.

"You will have higher prices for beef and pork and poultry, but that does take a while to work through the system," U.S. Department of Agriculture economist Larry Salathe says.

The Recent Rise In Grain Prices Bad weather and increased demand caused a steep rise in grain prices over the last year.

A Sudden Jump …

The USDA has released a report showing that in October, grain prices took huge leaps. The price paid to farmers for a bushel of corn averaged $4.78, up from $3.61 in the same month last year. The price per bushel of wheat jumped to $6.08, compared with $4.47 in the same month of 2009.

The numbers were the latest of a steep and sudden rise in grain prices that started when summer weather took its toll on crops worldwide. Some of the worst weather was in Russia, where drought became so severe the government banned all exports of wheat. Elsewhere, flooding wiped out wheat farmers in Pakistan, and poor weather in parts of the United States also reduced grain production.

Corn in particular has been in short supply this year. U.S. farmers didn't produce enough to satisfy all of the demand from ethanol producers, food companies and livestock growers.

At the same time, the demand for grains continued to increase in much of the world. The growing ranks of middle-class families in India and China have been buying more food, adding to the demands on farmers.

… And A Slow Rise

But while grain prices have been soaring, grocery store prices have remained subdued. Over the past year, the federal Consumer Price Index for food has gone up only 1.4 percent. That's the lowest annual food inflation rate in nearly two decades.

The contrast between farm price increases and retail price stability reflects how different sectors of the economy are responding to change. In the agriculture commodity markets, prices can change by the minute to reflect new conditions. The grain prices jumped up immediately this summer when it became clear that bad weather around the globe was going to hurt crop yields.

But the spike hasn't translated immediately or directly into an equal-sized jump in retail food prices. That's because the price of groceries is tied to many costs, such as packaging, marketing, labor and, most especially, transportation. The biggest single cost in a box of cereal is the cost of delivering it to the local grocery store, so the cost of gasoline is a bigger factor than corn in the retail price.

Still, the rising grain prices are starting to create some inflationary pressures. General Mills Inc. recently announced that in mid-November it will impose a "low single-digit list price increase on selected cereals."

Also, as grain prices rise, the cost of feeding livestock goes up. As a result, economists now say food price inflation likely will rise by at least 3 percent in 2011.