Trio of Factors Pushing Food Prices Higher

US - Grain shortages, Middle East turmoil and extreme weather in critical crop-producing regions have combined to send retail food prices higher this year, says a Purdue University agricultural economist. Prices could climb further if commodities markets continue their upward march.
calendar icon 14 March 2011
clock icon 4 minute read

American consumers can expect to spend about 4 per cent more for food this year than in 2010, said Corinne Alexander. Beef, pork and poultry products likely will see even greater price hikes, she said.

US food price inflation reached 7.5 per cent in September 2008 before falling 10.5 per cent by November 2009. It's been moving back up ever since.

"We're returning to a period of food price inflation after coming off a period where we saw food price deflation," Alexander said.

"We don't expect this to be a long-term, permanent higher food price period. We'll see these higher food prices until we rebuild global stocks of the primary crops."

Shortages in corn, soybean and wheat stocks have pushed prices to their highest levels this decade. Corn and soybeans are used for food products, animal feed and in biofuels production, while wheat is the principal ingredient in breads and cereals.

Since mid-2010, corn futures prices have more than doubled to more than $7 per bushel and could exceed the $7.65 record set in 2008. Soybean prices are up 40 per cent from one year ago, to just over $13 a bushel. Wheat futures have risen more than 50 per cent since this past July, to $7.75 per bushel.

"With higher grain costs, the biggest food inflation price impacts we expect to see are in the livestock area," Alexander said.

"Because those feed costs are up, we're expecting beef prices to be up on the order of 5.5 to 6.5 per cent in the coming year. Pork prices will be up on the order of seven to eight per cent. Poultry prices will rise more moderately because it doesn't take near as much grain to get a pound of chicken as it does a pound of pork or beef, so chicken prices will be up about three to four per cent."

Oil markets also are affecting food prices. Recent uprisings in Egypt and Libya have sent oil soaring to more than $100 a barrel. Food companies have absorbed some of those price shocks but will have to charge more for their products should oil markets surge higher, Alexander said.

"We're in a world today where food companies operate on the assumption that crude oil prices are going to be $85 to $95 a barrel," she said. "Current prices are somewhere around $105 to $110 a barrel."

Weather has played havoc with food production, as well. Drought devastated Russia's 2010 wheat crop, leading Moscow to ban wheat exports. Freezing temperatures this winter cut into Mexico's production of tomatoes and bell peppers.

Storms have battered the sugar industry, sending prices to more than double what they were in 2009.

"Brazil didn't have a great crop," Alexander said.

"Add on top of that Australia, the third largest exporter of sugar in the world. Queensland, which is their sugar-growing area, had massive floods and then got hit by a cyclone."

Not all the news is bad for consumers. Milk production remains high, despite the poor prices dairy producers are receiving. And the total amount the average US family spends on food continues to be about 10 per cent of their take-home income, compared with 40 per cent to 50 per cent in developing countries such as Bangladesh.

"When you see massive food price inflation and food is half of your family's budget, it hurts substantially more," Alexander said.

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