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Food Prices Expected To Surge In 2008

Think gas is expensive? Just wait.

By Mark Huffman
ConsumerAffairs.com

January 7, 2008

The warning comes not from government officials or consumer advocates, but a stock market analyst.

Donald Coxe, who follows global market trends for Canada's BMO Financial Group, says a surge in commodity prices in 2007 will translate into a similar surge in food prices in 2008. He told Toronto's Empire Club last week it's going to hit hard, and it's going to hit this year.

After years of price stability, why are food prices set to soar? Two reasons.

• Growing demand The first is the same reason that has pushed gasoline prices higher. Growing economies in formerly undeveloped nations have increased demand for food products. The growing middle classes in Bombay and Shanghi want to eat as well as the middle class in Chicago and San Diego.

• Ethanol Aggravating the problem is America's new enthusiasm for ethanol. The new demand for corn and soybeans for government-subsidized biofuels means there is less available to feed livestock. Though biofuels producers are quick to deny a link, there is an unmistakable overlap between the rise in commodity prices and the rapidly increasing production of ethanol.

Consumers have already seen the impact in the grocery aisles.

USDA statistics show the average retail price of a dozen eggs went up 38 percent, to $1.86 in November 2007, from a year earlier. Milk prices are also sharply higher, up 30 percent a gallon to $3.90. The cost of a loaf of whole-wheat bread is also up, though not as much. But the cost of a 24-ounce loaf of bread is quickly catching up to the cost of a gallon of gasoline.

When it comes to food commodity costs, corn leads the way. Its price has risen almost 50 percent in the last year and a half, as both the cattle industry and ethanol producers have competed to buy it.

While the U.S. stock market showed mixed results last year, agriculture stocks were through the roof, an indicator that investors believe anything connected to producing food will pay huge dividends in the months ahead.

Arts-Way Manufacturing, a small Iowa farm equipment maker, saw its stock price surge from $6.19 to $39.75 in less than 52 weeks, a quantum leap the likes of which have not been seen on Wall Street since the dot-com boom.

Coxe says countries that a few years ago were trying to increase their exports of corn and other grains are no longer doing so. In fact, he says some have actually placed bans on their export, since they are increasingly needed at home to feed the domestic population.

USDA reports that retail food price inflation accelerated in 2007 as higher commodity and energy prices began to work their way through the food price system.

The Consumer Price Index for food increased 2.4 percent in 2006 and, over the past ten years, has increased at an average annual rate of 2.5 percent. For 2008, USDA projects that average rate to nearly double. Coxe and other industry analysts think it might well be understated.

The respected British magazine The Economist's food price index is higher today than at any time since it was created in 1845. The index shows prices have surged by 75 percent since 2005, and another big hike could be headed our way in 2008.

In 1942, when the U.S. mobilized to fight World War II, Americans were urged to plant "victory gardens" to make up for the vast quantities of food shifted to the military. At the time, most people lived in places where they had ready access to a garden plot.

Today, with more of the U.S. population centered in urban areas, it may be a different story. But if food prices do, indeed, follow the path of oil prices, consumers may want to brush up on their gardening skills, and find a small patch of land where they can raise a few vegetables.

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