According to the Bureau of Labor Statistic's most recent Consumer Price Index report, consumers saw a price increase of 2.8% during the the last yearly period for food bought at grocery stores. This "food at home" component includes grocery staples such as milk, bread, vegetables and meat. World economic growth, rising crude oil prices, shrinking stockpiles, strong commodity demand and severe crop-destroying weather have created a perfect storm of sorts, resulting in rising food costs worldwide. In fact, the global food price index, compiled from price data for sugar, cereals, oils, meat and dairy products, recently reached a new, all-time high. While the effects of increased food costs are felt everywhere, from the school cafeteria to our favorite restaurants, here are five staples that cost more at the grocery store. (Inflation is often a consequence of economic recovery. Here's how you can protect your financial portfolio. Check out Fight Back Against Inflation.)
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Corn is partially to blame for rising meat costs. The price of corn has doubled in the past year, driving up the price of livestock feed, which results in higher prices for meat. Supply and demand factors are affecting prices as well, where strong demand for cattle and hogs has been tempered by a weak supply, further driving prices upward. Cattle herd sizes, for example, are at their lowest levels since the 1950s. Retail meat prices have risen more than 7% in the last year, according to the Consumer Price Index. Consumers can expect to see prices increase for certain cuts of meat, including short ribs, hamburger and high-end cuts like filet mignon. Cattle futures on the Chicago Mercantile Exchange recently closed at an all-time high of $1.1752 per pound.
Rising incomes in developing nations increase the global demand for dairy and meat products, according to an annual outlook from the Organization for Economic Cooperation and Development and the United Nation's' Food and Agriculture Organization. Data from the Dairy Export Council indicate that milk shipments surged 63% last year, and cheese exports are at an all-time high. Increasing feed costs also affect the price of milk and dairy products as farmers face record costs for raising dairy cows. Dairy prices have climbed by 15% last month, and milk futures, traded on the Chicago Mercantile Exchange, rose more than 50% in the past year. Cheese is trading at prices not seen since 1984.
Bad weather - droughts, floods, hail and freezing temperatures - impact the costs of fresh fruit and vegetables. Earlier this year, farmers in parts of Mexico and the southwestern United States were pounded by catastrophic crop losses following the worst freeze in 60 years. Florida again was hit with a late freeze, destroying 60-70% of its tomato crop. As a result of these late freezes, produce prices have doubled in some cases. The tomato situation became so dire that some fast food restaurants were forced to temporarily eliminate tomatoes from their sandwiches, or make them available only upon request. (Inflation is less dramatic than a crash, but it can be more devastating to your portfolio. See Coping With Inflation Risk.)
Corn prices doubled in the six months between July 2010 and January 2011. The price of corn directly and indirectly affects the costs associated with a number of products. Corn is used to feed livestock; when corn prices increase, so do prices for meat and dairy products that rely on corn for animal feed. Corn is also used in everything from ethanol to sugary drinks. Bad weather has severely damaged crops worldwide, and the nation's corn supply is at its lowest level in nearly four decades, according to the U.S. Department of Agriculture. In addition, ethanol production in the United States eats up about 35 million acres of corn, incentivizing farmers to convert wheat and soy fields to corn, reducing supply for these commodities as well.
Wheat prices have roughly doubled following a devastating drought in Russia last summer that destroyed the major wheat exporter's crops. Wheat prices have also been driven higher as countries, trying to avert food-related protests, have begun buying staples like wheat to stockpile. Costs for wheat, now the world's leading food grain, have tripled since 2008 in some countries, and are expected to rise as worldwide supplies strain to meet demand. The dominant wheat producers - China, India, the United States and Russia - have in recent years suffered extended droughts and periods of bad weather that have reduced crop yields. This year's U.S. winter wheat crop, for example, is being impacted by drought conditions, and the U.S. Department of Agriculture anticipates that the harvest will drop from 60 to 56 million tons. (Look beyond traditional bonds when planning long-term. The alternatives can be extremely rewarding. Check out 5 Inflation-Beating Bond Picks.)
The Bottom Line
Although the average family in the United States spends only 10% of its disposable income on food - compared with 30% for Europeans - rising food prices are felt by nearly any budget. Some manufactures, trying to avoid scaring customers away with price increases, have reduced product sizes instead. Tropicana orange juice, for example, used to come in a 64-ounce carton; the new size is 59 ounces. Kraft American cheese has snuck two slices out of its regular 24-slice package, and Chicken of the Sea Salmon replaced its three-ounce container with a 2.6-ounce substitute. Growing worldwide demand for certain food products, rising production costs, bad weather, and increasing transportation costs result in higher food prices at the wholesale and retail level.