Price for Oil, Grains Fall -- But Food Prices Unlikely to Soften Before 2009
The Bulletin (Bend, OR) -- November 11, 2008 -- While crude oil and grain prices have fallen considerably in recent weeks, food prices have not.PAID ADVERTISEMENT
Crude oil and grain commodities such as wheat and corn are linked because they're all tied to the strength of the U.S. dollar and the global economy, said Joe Victor, a grains analyst for Allendale Inc., based in McHenry, Ill.
Consumers who see gas prices dropping dramatically may be surprised to see their food prices staying the same, Victor said. Food prices are usually slower to follow commodity prices because food costs -- influenced by the cost of transportation and packaging that uses materials derived from petroleum products -- take time to work through the system, he said.
Throughout the country, retail food prices of basic items at the supermarket increased about 4 percent in the third quarter from the second quarter of 2008, according to the latest American Farm Bureau Federation Marketbasket survey. The informal survey shows the total cost of 16 basic grocery items was $48.68, up $2.01 from the second quarter of this year.
Crude oil, wheat and corn prices, meanwhile, have dropped 59 percent, 60 percent and 53 percent, respectively, from their all-time highs established earlier this year.
"Once you see grain prices go higher, it does not take long for major food companies to raise prices," Victor said. "But this drop in grain prices has also proved that once there is a relaxation of prices, they are not as quick to come down."
Lower grain and fuel costs need to be absorbed within the system before they can be passed along to the consumer, Victor said.
Also, food-processing companies are unlikely to lower prices during the holiday season, when food demand peaks, he said.
"It is more likely we could see some softening after the new year," he said.
Food-processing companies throughout the United States posted high profits in the third quarter but say their production costs remain high.
"Regarding pricing, I can tell you that input costs overall (including commodities) still remain well above the 10-year average," Lisa Gibbons, a spokeswoman for Northfield, Ill.-based Kraft Foods, wrote in an e-mail.
Kraft, which posted a 19.4 percent increase in sales in the third quarter, said higher input costs mean consumer prices could stay high in the foreseeable future.
"As (input) prices moderate, in some cases, (consumer) prices will decline, but improving margins, share and volume will grow our profits," she said. "We still expect $2 billion (in additional) input costs in 2008," which is a 13 percent increase. "With improving brand equity, we are confident in our ability to cover costs through pricing and productivity, whether costs are going up or down."
Affected goods Net sales at Archer Daniels Midland, a food and ingredients company that also has a stake in biofuels production, increased 65 percent for the quarter ended Sept. 30, due principally to higher average selling prices that were implemented to cover year-over-year increases in underlying commodity costs (for things like corn for its high-fructose corn syrup product), according to a company news release.
Third-quarter price hikes were across the board, according the American Farm Bureau survey.
Potatoes, cheddar cheese and apples showed the largest retail price increases, according to the farm bureau. From the second quarter, a 5-pound bag of potatoes rose 83 cents to $3.38; cheddar cheese rose 31 cents to $4.91 per pound; and apples rose 26 cents to $1.80 per pound .
Other items that increased in price included pork chops, up 22 cents to $3.62 per pound; ground beef, up 10 cents to $2.95 per pound; flour, up 5 cents to $2.62 for a 5-pound bag; and whole milk, up 4 cents to $3.92 per gallon.
Retailers say there's little they can do short of eating the higher costs themselves, but that strategy is difficult in a slow economy, said Joe Anzaldo, assistant manager at Newport Avenue Market in Bend.
Food price increases started Jan. 1 and "just kept on coming," Anzaldo said.
"It's just been huge," he said. "The price increases have not slowed, from what I can tell."
Newport Market is still seeing fuel surcharges from most of its delivery companies and constant price increases from suppliers, Anzaldo said.
The price increases have come across the board, including everything from a candle to a gallon of ice cream, he said.
Food sales Despite the higher prices, food sales have increased this year, most likely because more people are eating at home instead of restaurants, Anzaldo said.
Merchandise sales on items such as candles and other household goods, meanwhile, have taken a "huge hit," he said. Overall, he said, business is down this year.
The Village Baker in Bend also is still getting hit with fuel surcharges and price increases on items such as flour, owner Bill Kurzman said.
The retailer raised its bread prices in June about 25 cents a loaf, Kurzman said.
"We would love to see food prices go down and the fuel surcharges go away," he said. "Right now, our costs are so high, and business is down because of the economy. We're not able to bring prices down."
Shoppers are looking for deals and changing their buying habits amid the run-up in prices, which started at the beginning of the year, according to the survey.
"I definitely notice a difference in price when I do my weekly shopping," said Derek Ellis, 42, of Bend. "I don't pick up what I want to eat as much as what's on sale."
Ellis was shopping at Newport Avenue Market on Thursday, where he purchased domestic beer instead of the more expensive microbrews.
His shopping experience is all about finding the deals, he said.
"I also shop at Safeway because they have some killer deals there," he said.
At Safeway on Century Drive, Jamie Hildebrand said she has reduced her meals out but still finds grocery shopping expensive.
"We are all seeing increased prices in stores," Hildebrand said after shopping with a friend. "We all eat out less, but I'm not sure it is balancing out."
Farmers Farmers, meanwhile, are benefiting from lower fuel costs but seeing their crop prices plummet.
Crude oil prices have dropped 59 percent since July 7, according to the CME Group Inc., a derivatives exchange company based in Chicago that owns the Chicago Board of Trade and New York Mercantile Exchange. Crude oil prices closed at $60.30 a barrel on Thursday.
Other commodities have followed oil's lead.
A bushel of corn closed at $3.79 Thursday, down 53 percent from its high of $7.99 per bushel on June 23.
Wheat, meanwhile, has dropped 60 percent from a high of $12.84 per bushel on March 10 to close at $5.18 on Thursday, according to CME.
Wheat and other commodity prices have followed the price of oil, which has been weakened by slowing demand and a strengthening dollar, said Tammy Dennee, executive director for the Oregon Wheat Growers League, based in Pendleton.
Growers who sold early last year, then saw wheat prices skyrocket to $13 per bushel, waited this year for prices to rise again, only to see them plummet to $5 per bushel, Dennee said.
"Many farmers held on to their crops believing they were going to escalate," she said. "They waited and they lost."
Terrebonne farmer Rex Barber Jr., who grew his normal-sized crop of 250 acres of wheat this year, sold about 60 percent of it before the market fell, he said.
"I may plant a little bit more in the spring, but that's going to depend on what I can sell it for," he said.
Author: Jeff McDonald, The Bulletin, Bend, Ore.
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