Other than your paycheck, the local grocery store may be the finest example of global economic forces at work. Statistically, if you're among the world's wealthy, rising food prices are of no concern to you. But the same stats show that you're likely not in this elite group. Instead, there's a strong chance that you're in the large group that spends 15% of their income on food, and even the smallest rise in food prices can severely impact your family budget. (For more, see A Map To Grocery Store Savings.)
Have you ever wondered what causes food prices to fluctuate? Like most questions involving global economics, there is no easy answer, but here are the five main factors affecting your grocery bill.
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If you haven't heard, corn has been on the rise lately. In fact, in a recent poll, 63% of farmers are holding on to their remaining corn reserves because they believe 2011 will see record high prices again. According to Agriculture.com, the price of corn could rise another $2 in the not-so-distant future.
2010 was a tough year for corn production. According to the U.S. Department of Agriculture, a combination of wet weather and abnormally high temperatures caused the amount of corn produced to be lower than normal.
The world consumes a lot of corn and because of that, there isn't a lot of excess corn to keep prices lower. So, when the price of corn rises, those who make the food that you later buy have to pay more for it and that cost is passed on to you. (To learn more, see Investing Seasonally In The Corn Market.)
In 2008, there were 751,000 farmers and ranchers in the United States, representing 0.05% of the American workforce. The average age of a farmer is now 56-years old and statistics show that 90% of the farms are sold instead of being passed on to a son or daughter in the family. As much of the nation's farmland is sold, it is being converted to residential or commercial property. This poses the risk that as global demand increases and the amount of farmland decreases, supply and demand could become far out of balance causing food prices to rise significantly.
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Remember the $4 per gallon gas of the recent past? Those who do will also remember that it doesn't take a large rise in fuel prices to alter your monthly budget. The high cost of fuel is also felt by the world's food producers, who have to spend more to ship their products. This increased cost is passed on to you at the grocery store.
Consider this story from WTOL Toledo. Hal is a delivery driver for a food wholesaler in Toledo, Ohio. When gas prices are what many have come to call normal, Hal fills up his delivery truck for $65. A change of 20 cents a gallon only gives Hal three quarters of a tank. How does that translate to you? Although there is no delivery charge, during periods of normal fuel prices, they charge $8 for lettuce but with just a small rise in prices, less than 50 cents, that same lettuce costs $10.50. Much of the price of the food you eat is a result of the infrastructure needed to produce it and get it to you, rather than the underlying cost of the raw materials.
Most agree that when gas prices were at $4 per gallon, it was, in part, due to speculators. Speculators are investment professionals who most likely don't own the underlying commodity (a commodity is simply a raw material) yet buy and sell contracts in an attempt to make money. This can cause artificial rise and fall in the price of a commodity which, if it stays sustained, could adversely affect your prices at the grocery store.
In 2008, congress pondered limiting the amount that Wall Street banks, pension funds and other large scale investors could speculate on commodities. Once oil prices returned to normal, this became a largely forgotten initiative but now, as grain prices rise, congress is again considering it.
Whether or not speculators are having a large-scale effect on the prices of the raw materials that make your food is the subject of a Republican versus Democrat debate, but research appears to indicate that there is more at work than supply and demand. (To learn more, see An Overview Of Commodities Trading.)
Ethanol is produced from corn. In fact, a lot of corn. It is estimated that close to 5 billion bushels of corn are needed to produce the ethanol that will be/has been used in 2010/2011. Is this extra demand causing prices to rise? The U.S. produces approximately 14 billion bushels of corn annually and any surplus will be either stored for later use or exported.
The Bottom Line
Some believe that the rise in commodities used to bring your food to the grocery store is only short term, while others believe that increasing global demand with diminishing supply will cause food prices to skyrocket. If the latter becomes reality, expect further economic pressure for middle and lower-class families around the world. (For more, see 22 Ways To Fight Rising Food Prices.)
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