U.S. Food Prices Likely to Keep Rising

November 20, 2008
By Andrew Martin
International Herald Tribune

For the past year or two, U.S. food manufacturers have streamlined production, reduced package sizes and raised prices, saying that they had little choice because of the unprecedented increases in the cost of ingredients like corn, soybeans and wheat.

Now, with the price of oil and other basic commodities plunging, it might seem logical that food prices would follow. Don't count on it.

Government and food industry economists are predicting that the overall cost of food at U.S. grocery stores and in restaurants will continue to increase in 2009, with prices particularly high for meat and poultry.

Even as overall consumer prices recorded their biggest drop in history Wednesday in the United States, food prices continued to inch upward, albeit at a slower pace than in previous months. The Labor Department's consumer price index showed that food prices had increased 0.3 percent in October, compared with 0.6 percent in September and August.

Increases for sugar and sweets, non-alcoholic beverages and meats were mitigated by declines in produce and dairy prices. The Department of Agriculture forecasts that food prices will jump by 4 percent or 5 percent in 2009, compared with 5.5 percent this year. Some predict much steeper increases.

Bill Lapp, principal at Advanced Economic Solutions in Omaha, Nebraska, said he anticipated that food prices would increase between 7 percent and 9 percent next year. He explained that the cost of ingredients like corn and soybean oil remained well above historical averages.

"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.

Additional increases in food prices might seem counterintuitive, since the cost of several main ingredients - corn, wheat and soybeans - have dropped precipitously in recent months. The price of corn, for example, fell by more than half since its peak earlier this year.

In addition, some food companies, including Kraft Foods, Campbell Soup, Heinz and Kellogg's, have reported robust increases in profits, a trend that some have attributed to price increases.

But food manufacturers say they have little choice but to raise prices, given the huge spikes in ingredient costs.

Officials at Kraft Foods maintain that its long-term goals are to use price increases simply to cover higher costs, not to increase profits. Michael Mitchell, senior director of external communications, said that Kraft's food costs this year were $2 billion higher than in 2007, a 13 percent increase, but that Kraft had raised its overall prices by only 7 percent.

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

Even the restaurant industry, which has been battered by a sharp drop in customers, has not raised prices enough to keep pace with the cost of ingredients. Hudson Riehle, a senior vice president at the National Restaurant Association, said wholesale food costs had increased 8.8 percent this year through September from the levels of a year earlier, but menu prices had increased only 4.3 percent.

http://www.iht.com/articles/2008/11/20/business/food.php