An abundance of food at reasonable prices is something most Americans take for granted. When prices rise, there may be multiple causes, since there are many factors that drive the retail price paid at the market. These include the cost of the raw materials or commodities (farm value), labor, transportation, packaging, marketing, taxes and other miscellaneous costs. (Trim the fat from your grocery bill to reduce the impact of food cost on your budget. See 22 Ways To Fight Rising Food Prices.)
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What is most significant is the relative drop in the farm value over the past half-century. In 1950, it represented over 40 cents of every food dollar spent - 40% of incoming funds were dedicated to purchasing farm related items. Over the last decade, it has hovered around 19 cents. This illustrates a dramatic change in the foods we eat and how we consume them. In the 1950s, more food was purchased directly off local farms without intermediate processing, packaging and mass distribution. In addition, the amount of food we consume away from home has doubled since then.
Because of these trends, price changes at the farm level in the U.S. have less impact on a percentage basis than ever before. Here's a look at what's happened to food prices over the past year.
Corn shot up 69% last year, as production in the U.S. dropped 4.9% due to unfavorable weather conditions. This will leave inventories in the U.S. at their lowest level in 15 years, while world inventories of 127 million tons are at four-year lows. A combination of unusually heavy rains and high heat across the Midwest forced the USDA to drop yield estimates and resulted in spikes in commodity prices. Corn has also been diverted to the production of ethanol as a fuel source, putting more upward pressure on prices.
The impact of any price increase in corn is wide-ranging, since it is used in so many different food items, as well as a primary source of livestock feed. Some of those products include: cereals, fruit drinks, ice cream, soups, syrups, beer, cakes, tortillas, breads and lunch meats.
Coffee was up 65% last year, reaching its highest level in 13 years. Two-third's of the world's supply comes from just three countries: Brazil, Vietnam and Colombia. Unfavorable weather conditions have impacted production, which has resulted in the depletion of U.S. coffee reserves to the lowest point in a decade. As demand has increased, evidence suggests that Vietnam and Brazil may be hoarding beans to restrict supply to the open market. (Stick to your budget every day with these 15 simple tips. Check out Squeeze A Greenback Out Of Your Latte.)
Wheat jumped 47% during a year when the winter wheat acreage was the smallest since 1913. Surging worldwide demand and bad weather have both contributed to reductions in yield estimates. Russia's wheat fields were devastated by drought while too much rain, and flooding hurt production in Canada and Australia. According to the USDA, wheat inventories in the U.S. are estimated to be 16% lower than a year ago.
Wheat is contained in many food products, including: bran, crackers, pasta, flour, donuts, beer, mayonnaise, puddings, whiskey, hot dogs and cereals.
After a record harvest in 2009, U.S. soybean production fell in 2010 and helped fuel a 44% increase in prices. The tightness in supply has resulted in a 25 million bushel drop in estimated inventories before this year's harvest. Argentina, another large producer, experienced relatively dry conditions that hurt production.
Food products containing soybeans include: tofu, sausage, ice cream, vegetable oil, candy, baby food, peanut butter, salad dressing, margarine, sauces and vegetable shortening.
The effect of higher commodity prices has impacted retail prices to varying degrees. United Nations data indicate a 25% jump in wholesale prices, driven largely by oilseeds and grains. This has resulted in export bans in India and riots in Algeria. China dipped into its strategic reserves of corn and sugar to arrest inflation that was at its highest point in over two years. Many foreign countries are raising food imports, and the elevated demand is forcing higher prices.
As the world's largest exporter, the U.S. was able to mitigate higher commodity costs, registering an overall retail food price increase of 1.5% last year. The USDA forecasts 2-3% in the coming year, still maintaining an inflation rate lower than the 10-year historical average.
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Things to Watch
Consumers have seen the effects of price hikes on individual products, and many American companies have indicated higher prices lie ahead. Grocery stores from Winn-Dixie to SuperValu have already confirmed such expectations. We can anticipate higher prices for staples, such as sugar, butter, oats and oranges, as well as foods that contain these items and the commodities previously identified. (The futures markets can seem daunting, but these explanations and strategies will help you trade like a pro. Check out Tips For Getting Into Futures Trading.)
The rising trend in oil prices is also concerning, since it directly impacts the cost of planting and harvesting. Beyond that, transportation costs from the farm to distribution centers and retailers will add more fuel to cost escalation. The monetary policies of both the E.U. and U.S. are likely to cause more inflation as debt levels continue to rise on both sides of the Atlantic.