Higher prices show no sign of retreating

December 31, 2007|By Mike Hughlett, Tribune staff reporter

Gloria Ford began noticing a few months back that her grocery costs were spiking, particularly for milk and eggs.

"I've joked, 'Did the chickens go on strike?'" she said last week, fresh from a trip to a Berwyn supermarket. Nowadays, she's keeping a sharper eye out for bargains on eggs -- and anything else in the grocery aisles.

That's a good idea because U.S. food prices have risen this year at more than twice the rate of 2006, and at a pace not seen since 1990. The outlook isn't any better. Many economists say this year's estimated price increase of about 5 percent could be part of a trend that threatens to ratchet up food costs for years.

That possibility is rooted partly in the rise of ethanol and partly in strong economic growth in developing nations.

The ethanol industry's voracious appetite for corn ripples through the food chain. Take eggs, for instance. Chickens eat corn, and corn prices have shot up as the ethanol business has blossomed.

Meanwhile, consumers in many developing countries are increasingly finding they have more income to buy more food, and relatively more expensive food, like chicken.

If this year's rise in food prices is indeed part of a long-term trend, lower- and middle-income consumers in particular will feel a pinch in years to come. And U.S. economists might have to rethink the way they view food inflation, which is predicated on the view that food price swings are inherently cyclical and therefore less worrisome than long-term changes.

"The days of cheap food may be over," said Benjamin Senauer, co-director of the University of Minnesota's Food Industry Center.

For decades, food price inflation has usually tracked below the general rate of inflation. And when prices do spike, it's usually because of a short-term issue, like a crop failure.

Indeed, bad weather in Australia is a factor in record wheat prices set this year. Other cyclical issues are at work in the current price rise, particularly soaring energy costs. With oil at almost $100 per barrel, food producers face considerably higher costs to make and transport their goods.

The ethanol expansion isn't a short-term trend, and the industry is using about 25 percent of the U.S. corn crop.

"In the U.S., we've had the biggest corn crop we've had in years -- rail cars are backing up -- but we still have corn at over $4 a bushel," Senauer said. That price rarely topped $3 per bushel over the last decade until this year.

"Corn is at the very core of our food system," Senauer said, in everything from animal feed to soda sweeteners.

Soybean acreage shrinks

As corn prices rise, farmers have an incentive to switch to it from other crops, particularly soybeans. And as soybean acreage has declined this year, soybean prices have hit near-record highs, and soybeans are increasingly being used for biodiesel, another fuel.

"We have never used so much food for fuel," said Michael Swanson, an agricultural economist at Wells Fargo in Minneapolis.

Energy needs will increasingly drive food prices, he said. "There's been a sea change, as much at the ethanol people say it's not true."

The ethanol industry adamantly says it's not driving any food price swings. It maintains that soaring energy costs and rising labor expenses are much bigger issues than corn prices, and it notes that corn or any grain tends to account for only a small component in the overall cost of any food product.

"To blame ethanol for moderately rising food prices is disingenuous at best," said Matt Hartwig, a spokesman for the Renewable Fuels Association, the industry's trade group. "It's a terribly simplistic look at a complex issue."

Adding to that complexity is the growing global demand for food as incomes rise. China and India's rapidly expanding economies get the most attention, but the last five years have been some of the best ever economically in developing nations across the globe, Senauer said.

"When people's incomes start to rise, one of the first things they want to spend more money on is better food," he said. "They diversify their diets, and in most cases than means more animal proteins."

Grains, of course, are critical to animal feed. And global grain stocks are being squeezed by the growing demand for food: This year's high corn and wheat prices occurred despite bumper crops.

Food inflation has been a hot issue across the world in 2007, with the term "agflation" often used to describe it in the European press. It has been less of an issue in this country, at least partly because Americans spend less of their budget on food than the rest of the world.

In the U.S. last year, 5.8 percent of household consumption expenditures were allocated to food eaten at home, according to the Department of Agriculture. That compares with 8.7 percent in the United Kingdom, 13 percent in France and 27.8 percent in China.