Food prices likely to rise

The Straits Times
Nov 28, 2008 | 6:00 AM
Food prices likely to rise
Food manufacturers still trying to rebuild eroded margins, say experts

NEW YORK: The prices of oil, grains and other commodities have been plunging but why have the prices of most groceries in the supermarket not dropped?

Experts warn that consumers should not expect lower prices any time soon on most food items. They project that the overall cost of food will continue to climb next year, led by increases for meat and poultry.

A big reason, they say, is that food companies still have not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this year.

For more than a year, food manufacturers have been shaving package sizes and raising prices, declaring that they had little choice because of unprecedented increases in the cost of raw ingredients like corn, soya beans and wheat.

Now, with the price of grains and other commodities plunging, it may seem logical that grocery prices will follow.

But while some grocery items like milk and fresh produce are dropping, the prices of most packaged items and meat are holding firm or even increasing.

The United States Agriculture Department is forecasting that food prices will increase 3.5 to 4.5 per cent next year, compared with an estimated 5 to 6 per cent increase by the end of this year.

Some economists project even steeper increases next year.

For instance, Bill Lapp, principal at Advanced Economic Solutions, said he expected food prices to jump 7 to 9 per cent next year.

'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 next year and beyond,' said Mr Lapp, a former chief economist at ConAgra Foods.

While predicting future food prices is an inexact science, data released by the US Labour Department last week suggested the forecasters might be right.

Overall consumer prices recorded the biggest drop in the history of the consumer price index (CPI), but food prices continued to inch upward, albeit at a slower pace than in previous months. The CPI showed that grocery prices rose 0.1 per cent in October.

Hershey's, for instance, locked in high cocoa prices this year only to see prices drop this fall, analysts say. And even though ingredient costs like corn and wheat have dropped, meat and poultry providers say they still have not raised prices enough to cover their increased costs.

Packaged food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins.

Mr Michael Mitchell, a spokesman for Kraft Foods, said the company's food ingredient costs this year were running US$2 billion (S$3.02 billion) higher than last year, a 13 per cent increase, but that the company had raised its overall prices by only 7 per cent.

Mr William P. Roenigk, senior vice-president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand.

'The time is coming when we're going to see a very significant increase in the retail price of chicken,' he said.

Many economists acknowledge that predictions about food prices over the next couple of years are guesses, because commodity prices are unpredictable.

Mr Ephraim Leibtag, an economist for the Agriculture Department, said food inflation would slow by the middle of next year if commodity prices remained low. 'Right now, the forecast is about 4 per cent, but that would be lowered if we do not see any surge in commodity costs over the next few months.'

NEW YORK TIMES