Ethanol use sends food prices up, up, up
The tab for the increasing use of ethanol blends is creating a ripple effect felt in the grocery checkout line.
By Mark Albright, Times Staff Writer
Published July 15, 2007
In the past few months, Alberta Gregory switched to powdered milk, clipped more coupons and tried more store brands.
"Milk seems to go up 20 cents every time I buy it, and fresh fruits are just out of sight," said the Pinellas Park retiree. "Is it my imagination or are prices for everything going up?"
She's not dreaming. For the first time since 2004, food prices are rising faster than inflation. And they are forecast to stay up the rest of this year at the fastest pace since 1990. "The difference this year is higher prices for pretty much all foods," said Ephraim Leibtag, who compiles price forecasts for the USDA Economic Research Service.
After inching up in lockstep with modest inflation at about 2.5 percent annually for a decade, prices of 100 common foods in the Consumer Price Index are forecast to rise as much as 4 percent this year and already were up 4.9 percent in May, the most recent month available. It all means the higher cost of food is starting to nibble into disposable income that's already being gnawed by higher energy and housing costs.
The culprits? The cyclical vagaries of weather on seasonal crops, the rising cost of energy to produce, package and transport food and - the new wrinkle - the tab for shifting more of America's reliance on foreign oil to ethanol blends made from corn. That's sent corn commodity prices soaring.
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Corn is in just about everything. Feed is half the cost of raising a chicken, 40 percent for a steer. It's an ingredient in adhesives, shampoos and packaging. Even soft drinks like Coke and Pepsi are affected because high-fructose corn syrup is used as a sweetener.
The percentage of the corn crop headed to ethanol plants is forecast to jump to 31 percent from 14 within 10 years, according to USDA.
Ethanol production increased fivefold to 5-billion gallons in 2006. It's supposed to triple within five years as a plant-building binge continues, so it's not a matter of simply planting more corn next spring. USDA experts expect ethanol conversion backed by federal subsidies will keep corn prices high for years.
Standard crop rotation, for instance, meant farmers alternate corn with soybeans every other year. Now higher corn prices will prod farmers to grow corn two years, then soybeans once. Or maybe not at all. That increases the demand for fertilizer.
Side effects? Higher soybean prices, higher grain prices and even cotton prices as more agricultural land is converted to subsidized corn production. Over the long haul, ethanol plants are supposed to get more cellulosic biomass from switch grass, wood fibers and unused leftovers such as cornstalks. But until these crops can be harvested and processing technology developed, it's corn.
"As a result, retail prices for food will rise faster than the general inflation rate for the next several years," said Paul Westcott, a USDA economist.
Fed by speculators, corn commodity prices bounced as high as $3.75 a bushel this year, then settled back to around $3.40, well above a 25-year average of $3 and $2.50 in 2005.
Debate rages in Congress over a new farm bill. The Senate version, which mandates another 7.5-billion gallons of ethanol to provide 15-billion gallons a year by 2012, triggered a fight within agribiz.
"Our members already endured a 60 percent jump in feed corn prices and saw hay prices double in some places because of floods," said Joe Schuele, spokesman for the National Cattlemen's Beef Association, "We're shouldering too much of the biofuel burden."
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Commodities prices, however, have not fully hit retail food prices. That's because grocers and consumer product makers are swallowing some of the higher costs while turning to efficiencies to ease in higher prices or mask them.
"Simply passing higher costs on is the last resort," said Steve Smith, vice president of merchandise for Sweetbay Supermarket in Tampa.
Some manufacturers are reformulating recipes to create more concentrated versions of foods to trim packaging costs. Dannon Yogurt, for instance, ditched plastic lids in favor of a sealed foil top and slightly shrunk container sizes.
"Everybody in the industry is talking about how much more they can get away with downsizing packaging to maintain a price," said Pat Kiernan, a food industry academic and columnist for Grocery Headquarters. "It's very subtle. They switched us from uncondensed to condensed soups that cost more ounce for ounce long ago. They even did it to the old staple, canned vegetables."
Coffee, for instance, once came in one-pound bags. Volatile bean prices taught coffee packagers to alternate between 8, 10 or 12 -ounce bags to hold a familiar price stable. Some cereal makers shrink the bag, but not the box.
When an April freeze all but wiped out the Georgia peach crop, some Publix bakeries switched to half-size tins to keep peach pie prices under $10 and in line with other pie choices.
Still recovering from hurricane tree damage from 2004 and the spread of canker disease, Florida's citrus industry changed its marketing to counter orange juice prices jumping 25 percent in a year.
"Our value message now is health and nutrition from something that tastes good," said Bob Norberg, research director for the Florida Department of Citrus.
But packaging is pricing, too. Sales of cardboard half-gallons of OJ are flat. The growth is clear, plastic carafes such as Coca-Cola's Simply Orange that hold a few ounces less.
Food industry techniques to ease in higher costs can only go so far.
"Retailers have been conservative about passing all these added costs to customers, but profit margin pressures will require they pass it on for the rest of this year," said Deborah Weinswig, who tracks retailers for Citigroup.
Foods make up 15 percent of the Consumer Price Index and consume 10 percent of household income.
But higher retail food prices won't feed an inflationary spiral, predicted Brian Bethune, U.S. economist for Global Insight.
"But this will definitely cause disruption through the rest of this year, because the consumer is already at maximum pain level," he said. "People won't cut back much on food, but they will on other things like autos and apparel."
Mark Albright can be reached at albright@sptimes.com or (727) 893-8252.
Fast Facts
Many food prices are increasing faster than the rate of inflation
After years of minimal inflation, food prices are rising faster than the Consumer Price Index. So far, CPI inflation is up 2.8 percent in 2007, but food prices rose a whopping 4.9 percent in May. Here are some food price changes through May, compared with a year ago.
Beef - up 5.8 percent
Pork - up 3.9 percent
Poultry - up 5.7 percent
Fish and seafood - up 6.1 percent
Eggs - up 29.6 percent
Milk - up 7.5 percent
Cheese - up 0.8 percent
Ice cream - up 1.4 percent
Butter - up 0.3 percent
All fresh fruit - up 9 percent
Apples - up 13.8 percent
Orange juice - up 25 percent
Tomatoes - up 5.4 percent
Bananas - down 1.7 percent
All fresh vegetables - up 6.4 percent
Potatoes - up 5.3 percent
Lettuce - down 7 percent
Wheat bread - up 6 percent
Cereal - up 4.2 percent
Carbonated drinks - up 4.8 percent
Coffee - up 5.4 percent
Non-carbonated non- frozen drinks - up 3.4 percent
Beer - up 3.8 percent
Wine - (no change)
Sugars - up 2.4 percent
Compensating for higher fuel costs
Higher energy costs prompted 41 percent of grocery shoppers to change their buying behavior in May. Here's how:
Cook more and eat out less - 69 percent
Buy fewer luxury items - 65 percent
Eat more leftovers at other meals - 62 percent
Buy more store brands - 56 percent
Eat meals at less expensive places - 45 percent
Buy fewer foods - 40 percent
Shift from fresh foods to canned, boxed or frozen - 30 percent
Change grocery store - 17 percent
Source: Food Marketing Institute