Here’s a news flash that won’t be remotely surprising if you’re responsible for grocery shopping in your house: the cost of food has been rising. In the past year, consumer food prices have increased 4.4%, compared with a 2.9% price increase for all consumer purchases. The costs of a few foods in particular have skyrocketed: in 2011, meat, coffee and peanut-butter prices rose 9%, 19% and 27%, respectively. While some are predicting that food prices will plateau or even fall, it appears as if increased regulation and production costs will continue to mean higher food prices for wholesalers, and these higher costs will inevitably be passed on to consumers.
Last summer, corn prices hit a record high of $8 a bushel. Naturally, to get in on the action, farmers all over the globe have shifted production to grow more corn. As a result, prices for “the big daddy of the major U.S. crops,” according to Reuters, could fall 20% this year. Even if that happens, U.S. farmers should still be in good shape, with total domestic farm income anticipated at $96 billion, the second-best year ever (after 2011).
Corn may be the big daddy in the farming world, but even if corn prices come down, most consumer food costs appear to be headed in the other direction. The increase in gas prices is one reason why food prices are likely to keep rising, but it’s not the only one.
The New England Complex Systems Institute released a study last week linking speculation in global commodity markets to rising food prices. The study indicates that spikes in food prices in 2008 and ’11 came largely as a result of investor speculation and increased ethanol conversion, in which corn is used for fuel rather than food. The authors expect another “food bubble” to occur by 2013, which “may lead to major social disruptions” on par with the riots and unrest in North Africa and the Middle East in 2008 and ’11.
Another study, published last week by the United Soybean Board, warned that proposed regulations on poultry and livestock farmers could increase production costs by 25%, which could translate into consumers collectively paying up to $16.8 billion more annually for meat, milk and eggs.
The study, though, assumes that regulatory costs will all be passed along to consumers. Suppliers and retailers know that having customers bear the brunt of such cost increases would be bad for business. If retail prices soar, consumers will wind up buying less or downscaling in one way or another.
Retailers and producers are strategizing, and sometimes battling it out head to head, to try to avoid sudden and exorbitant increases on consumer goods — in order to keep consumers spending. Walmart, famed for its “everyday low prices” and an enormous presence in the marketplace, has been pressuring food companies such as ConAgra and General Mills to maintain low prices. Costco is another major retailer that’s playing hardball in order to keep prices on the shelves low: in 2009, it stopped selling Coca-Cola because the beverage company wouldn’t decrease wholesale prices.
What has developed is a push and pull between retailers and producers over which entity will absorb the higher costs. Some of these costs, of course, are passed off to consumers directly, in the form of higher retail prices. Companies also innovate and increase efficiency to lower their own costs. Procter & Gamble is cutting 5,700 jobs. To slice costs by 3%, Campbell Soup decided to reduce the ways it cuts carrots (from 40 to 5) used in its soups. General Mills introduced a smaller Cheerios box for Costco that lowers production costs as well.
In some ways, these “innovations” are essentially a price increase on consumers. After all, the customer gets less while paying the same. Such stealth price hikes are harder to notice than if your weekly grocery bill suddenly doubled.