Corn price plunges, but grocery cost holds higher
November 17, 2008 • By PHILIP BRASHER • DesMoines Register • desmoinesregister.com
Washington, D.C. - As the price of corn falls from record highs this summer, consumers expect to see prices in the grocery store decline.
But it takes time for price decreases to ripple through the economy. Factors such as ethanol, speculation, weather and even corporate decision-making can keep food prices higher, even while the prices of key ingredients, such as corn grown by Iowa farmers, plunge to half of what they were in June.
Corn prices have "taken quite a dip," said Darrel McAlexander, who farms near Sidney in southwest Iowa. "We haven't seen the food prices back off that much."
What gives?
Ethanol producers say the fact that food prices haven't dropped with the price of corn shows ethanol had little or nothing to do with rising grocery costs.
"Grocery manufacturers are making record profits and will continue charging whatever they think they can get away with," said Jeff Broin, chief executive of Poet LLC, which operates seven ethanol plants in Iowa.
ConAgra Foods Inc., General Mills and Del Monte Foods all had a double-digit increase in sales during the last quarter, in part because of product price increases.
Economists say the growing use of crops for fuel was only one factor behind the run-up in commodity prices over the last year. Speculation in the commodity markets, higher energy costs and weather have played a role, too. Food prices are expected to moderate as well, if not drop, in the coming months. But economists say it will take some time for the decline in commodity prices - and energy costs - to work its way to the supermarket.
"If commodity prices stay as low as they are right now, we'll certainly see (food) inflation come back down to a historical level," said Ephraim Leibtag, an economist who tracks food prices for the U.S. Department of Agriculture.
Food prices are expected to rise 6 percent this year. A pound of ground beef cost $2.98 on average in September, up from $2.74 the year before. A pound of cheese cost $4.82, up 38 cents in a year. That was well above the 4 percent increase in 2007, which in turn was the largest increase in food costs since 1990.
There's usually a lag between fluctuations in commodity and ingredient prices and prices in the store, Leibtag said. Manufacturers and livestock producers buy their inputs ahead of time, often under contract, so it can take months for them to feel the effects of an increase or decrease in crop prices. And the impact of crop prices varies by food.
"We've had some commodities rising 60 to 70, 80 percent, while food prices are going up 6, 7, 8 percent," Leibtag said.
The prices of meat, milk and eggs fluctuate as farms increase or cut back on their herds and flocks in response to the price of grain for feed. The USDA expects beef prices to rise as much as 7 percent next year, with the after-effects of the rise in grain prices.
For other foods, costs for packaging, transportation and labor often are bigger factors. They have more to do with the price of a box of cereal than the price of the grain does, for example.
Still, a major East Coast grocery chain, Wegman's, isn't waiting for the wholesale prices to drop to pass the expected savings to its customers. The family-owned company, which has stores from Virginia to New York, announced plans for price cuts that would save the average family $40 to $60 per month.
"During difficult times like these, it's OK with us if we make a little less money," the owners said in a message to employees.
Kraft Foods - a publicly traded company whose products include Ritz crackers, Oscar Mayer hot dogs as well as Kraft cheese - saw its net revenue rise nearly 20 percent in the latest quarter, helped in part by recent price increases.
Company spokeswoman Lisa Gibbons said prices could come down as production costs decline. But she said input costs "still remain well above the 10-year average" and are expected to be up 13 percent this year.
Tyson Foods, the nation's No. 1 meat processor, said this week it earned 13 cents per share in the latest quarter, up from 9 cents a year ago.
But the company, which produces its own chickens under contract with growers, said the business lost money because of high grain and feed costs. The company's beef and pork sectors made up for the red ink.
Tyson's profit for the fiscal year that ended in September slipped to $86 million, compared with $268 million for fiscal 2007.
For some foods, such as meat and frozen dinners, consumers have yet to feel the earlier increases in commodity prices, said Bill Lapp, an economist who advises the food industry. He expects food prices to rise 7 percent to 9 percent next year, a higher rate than the USDA forecasts.
The price of corn has been hovering around $4 a bushel, down from nearly $8 at its peak in June after the spring floods drowned fields throughout Iowa.
Federal ethanol policy is likely to still play a role in the prices of commodities and food. The price of corn needs to stay at about $4 or more per bushel in order to get farmers to plant sufficient corn to supply the ethanol required by the government's rising annual use mandate, said Bruce Babcock, an Iowa State University economist. If farmers don't produce enough corn next year, prices for the crop could shoot up again, he said.
Refiners are required to use 10.5 billion gallons of ethanol next year and 12 billion gallons in 2010.
The increase in crop prices has led some observers to call for greater regulation of futures markets. Prices for corn, wheat and soybeans all rose more this year than could be explained by changes in supplies and demand, according to the Minnesota-based Institute for Agriculture and Trade Policy.
"Probably the corn price went higher last summer than what it really should have," said McAlexander, the Sidney farmer.
"I would hope that we'll see some sort of an adjustment where food prices will stabilize at a lower level than they are today."
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