Food Prices Rising Faster Than Gas

Ethanol-driven demand for corn is just one of the causes.

While food prices are rising pretty much across the board, items related to corn are affected the most. That's because increasing demand for ethanol, made from corn, is driving up corn prices, which farmers use to feed their poultry and cattle. The high price of corn is also affecting prices of everything from cereal and other products with corn as an ingredient to the oils used to make potato chips.

The Star Tribune reports:

Rising gasoline prices have been getting all the attention, but the cost of another, more-important staple is actually rising even more: food.

In the past year, food prices have increased 3.7 percent and are on track to jump by as much as 7 percent by year's end. The current increase is more than double the 1.8 percent jump seen the year before, according to the consumer price index.

Meanwhile, gas prices rose 2.9 percent. Only the cost of health care rose more, and then just slightly.

While companies up and down the food chain see the increases, they're only beginning to pass them on to consumers. But with the start of grilling season -- meat prices particularly hurt -- some consumers are already tweaking their spending habits.

A recent study shows that more consumers are using coupons. Marilyn Pearson just resorted to clipping them again, though she hasn't changed what she buys. On a recent evening, the St. Paul resident's shopping cart was filled with collard greens, meat and other supplies for a barbecue. She's noticed the price of meat, some vegetables and dairy going up, but figures, "You gotta eat, you gotta buy."

While food prices are rising pretty much across the board, items related to corn are affected the most. That's because increasing demand for ethanol, made from corn, is driving up corn prices, which farmers use to feed their poultry and cattle. The high price of corn is also affecting prices of everything from cereal and other products with corn as an ingredient to the oils used to make potato chips.

But corn is only one culprit. Higher labor, packaging and fuel costs all play a role. Bad weather in California and Florida was the main contributor to a 20 percent spike in citrus fruit prices as well as higher prices for some vegetables. A drought this summer could cause prices to rise even more than current projections.

"We should all hope we have a really good growing season this year," said Ben Senauer, co-director of the University of Minnesota's Food Industry Center.

Eggs up almost 19 percent

Prices are rising in each grocery aisle. In April, eggs cost 18.6 percent more than a year ago. Whole chicken prices increased 7 percent. Bread is up nearly 6 percent and beef steaks up 5.5 percent.

Even watermelons cost more, according to a spokesman for Lund Food Holdings Inc., the Edina-based owner of the Lunds and Byerly's chains. High corn prices pushed farmers to devote record acreage to corn this summer, leaving some crops in short supply.

Senauer said many price increases haven't made their way to all stores yet, and many stores are absorbing the costs rather than passing them on to customers. "Right now the margins are simply being squeezed," he said.

"But that's not going to last forever," said Wells Fargo & Co. agricultural economist Michael Swanson, predicting no end in sight to food inflation. Swanson forecasts that food inflation will have risen at a rate not seen since 1990, when prices ended the year 5.8 percent higher.

Consumers have responded to higher fuel prices by grouping trips or leaving the car at home, and economists predict that Americans similarly will tweak their food habits -- reallocating some food dollars from eating out to buying groceries, choosing to eat less meat and cooking smaller portions to reduce waste.

Janet and Sam Nelson just purchased a stand-alone freezer so they could buy in bulk on sale. On a recent trip to Cub Foods on University Avenue in St. Paul's Midway area, the St. Paul couple was stocking up on $1 frozen dinners. Janet Nelson, a veterinary technician, said they eat fewer meals out now because of small increases on many items, even ramen noodles. The couple has also buckled down their spending on discretionary items. "There's no spare money for fun shopping," lamented Sam Nelson, who is self-employed.

More increases coming

In recent quarterly earnings conference calls, Target Corp., Supervalu Inc. and Hormel Foods Corp. each cited increased food prices as a factor to contend with. Target described food-price inflation as "fairly aggressive," and said it would need to fight it by increasing productivity at stores and distribution centers. Supervalu expects corn prices to affect the year's overall inflation levels, although the company declined to say whether customers will see rising prices at its stores, such as Cub Foods.

Hormel said the quarter's only disappointment was "that Jennie-O Turkey Store was not able to pass on higher grain costs through pricing as quickly or as thoroughly as we had hoped." The company expects to increase prices further for the rest of 2007.

Mike Oase, vice president of operations for Kowalski's Companies, said the company has had to pass on some of the price increases to consumers because profit margins in the grocery business are always "pretty thin." He characterizes Kowalski's current strategy for dealing with food-price inflation as a "50-50" approach -- the company is absorbing half of the increases and passing the other half along to consumers, who may have noticed the price of milk go up by "a few cents a gallon" in recent months.

Because food is a category that consumers can't cut from their budget, it's the cups of coffee, the entertainment dollars, and the clothes-and-jewelry budget that are scaled back first. In April, retail sales fell 0.2 percent, the first decline in seven months, according to the Commerce Department. Yet consumer confidence rebounded in May, mainly because of to consumers' cautiously optimistic view of business conditions. Still, a stew of high gas prices, food costs , a slumping housing market and adjusting mortgages could be a recipe for trouble for strapped Americans with little wiggle room in their budgets.