EmailEmail
PrintPrint
Food prices taking big bite out of household budgets
Food prices take a bigger bite out of household budgets
Friday, January 11, 2008
The falling value of the U.S. dollar is contributing to a rise in food prices, particularly with imported foods such as fruit from Spain.

A gallon of whole milk that sold for $2.78 in January 2000 costs around $3.95 today.

Eggs were 97 cents at the dawn of the new millennium. Now they're up to $2.49 a dozen.

The price of a fresh whole chicken has jumped from $1.05 to $1.49 a pound during the same time frame.

"A lot of that is attributed to the declining dollar," said P.J. DiNuzzo, president of DiNuzzo Investment Advisors Inc. in Beaver. "The weaker currency is having an effect all across the board, all the way to food prices."

The falling U.S. dollar isn't the only culprit. The rush for biofuels and record-setting oil prices also appear to be having a ripple effect on food prices.

According to the Consumer Price Index, the price of food on average has gone up 5.4 percent between November 2006 and November 2007, the latest figures available. The cost of dairy and related products has soared 14 percent, while the cost of meat and fish has gone up 4.1 percent, and the cost of bread has risen 8.1 percent.

"In general, food prices will continue to go higher as the dollar weakens," said Greg Womack, a certified financial planner with Womack Investment Advisers in Edmond, Okla.

"We're going to keep seeing higher food prices. Some of that will be because of the weaker dollar, but for other reasons too, including higher international demand for food."

The growing middle class in developing countries such as Latin America and Asia can afford more meat and milk, raising world demand and thus prices.

It comes down to corn

Also, the new federal energy bill calling for a sevenfold increase in ethanol production to meet clean air standards and reduce dependence on imported petroleum may be having the unintended consequence of causing shortages of corn -- which is used in ethanol production -- in turn driving up the prices of a wide array of food products derived from corn.

By 2012, the U.S. goal is to produce 7.5 billion gallons of ethanol a year, meaning U.S. annual corn production must increase 22 percent from about 10.9 billion bushels to 13.5 billion bushels to meet the demand.

Corn prices are at their highest level since the drought of 1995, jumping from around $2.18 per bushel in 2002 to $4.78 per bushel this week.

Beyond U.S. borders, the sharp rise in the price of corn recently led Mexicans to demonstrate in the streets of their capital city over the skyrocketing price of corn tortilla, a staple of their diet.

Corn also is an essential feed ingredient for livestock and poultry producers, so as the price goes up it becomes more expensive to feed farm animals, which increases the cost consumers pay for chicken, eggs, ham, bacon and other meats.

"Agronomically speaking, we are a 'corn' nation," said Paul Brahim, executive vice president of BPU Investment Management, Downtown.

"Cows, sheep, hogs, chickens and people eat corn. Additionally, corn byproducts such as corn oils and corn syrups are used in food processing. If you're a label reader, you'll see they're in just about every baked good and processed food in the grocery store."

The strong relationship between higher oil prices and the rising cost of getting food to the market also is causing some pressure on food prices, said Robert Dye, a senior economist for PNC Financial Services Group.

"Transportation of food is an issue because so much food is shipped by truck," Mr. Dyer said. "Higher diesel costs would be passed through to customers."

Inflationary pressures

The supply and demand for certain food commodities along with the decreased purchasing power of the dollar has delivered a double whammy on consumers.

According to Bloomberg financial news data, the value of the U.S. dollar since 2002 has dropped more than 70 percent against the euro, 44 percent against the British pound, 39 percent against the Canadian dollar and 18 percent against the Japanese yen.

Tom O'Brien, a financial talk show host in Clearwater, Fla., and chief executive of Tiger Financial News Network, said some food manufacturers that have not raised their prices have begun using smaller product packages and reduced contents.

"Inflation is in the food chain now for sure," Mr. O'Brien said.

Chuck Butler, World Markets president at Everbank in St. Louis, Mo., said that as long as the Federal Reserve continues to cut interest rates, food prices will go higher.

"The Fed has turned its back on inflation trying to rescue the housing market," Mr. Butler said. "It may be one of those examples of too much, too little, too late."

Some relief

Although food prices are on the rise, Bureau of Labor Statistics data shows either stable or declining prices for other consumer products such as electronics, clothing and cars, many of which are imported from other countries with stronger currency.

Rather than increasing prices here to compensate for the currency exchange, foreign companies selling hard goods appear to be accepting lower profit margins to avoid losing market share in the United States.

"A global company is developing business in the U.S., not on a month-to-month basis, but wants to develop their brand over three to five years," said George Van Horn, a senior analyst at IBIS World in Los Angeles. "A six- or 12-month currency move is not going to cause them to abandon a long-range plan."

Dr. Herb London, president of the Hudson Institute, a think tank in Washington, D.C., said Americans who had not traveled outside the country were living in a protective cocoon and had not fully felt the sting associated with a weaker currency.

"The most profound way the U.S. public would recognize the weakness of the dollar is traveling abroad," Dr. London said. "The typical American would get sticker shock if obliged to stay in a Paris hotel for $800 a night, yet remarkably this would be an average price for a hotel in Paris today."

Self-correcting economy

The falling dollar has a good and bad side for the economy as a whole, says Paul Zane Pilzer, an economist and best-selling author of the book "God Wants You To Be Rich."

In theory, he said, raspberries and plums grown in Ecuador should cost a lot more when the U.S. dollar is weak, and apples grown in Washington state should have no price change. But there is more to the equation.

"Because of the falling dollar, people in Japan can buy more apples, and that could bid up the price of apples here," he said. On the other hand, when we buy raspberries and plums from Ecuador, it creates more wealth for that country. But we gain U.S. wealth from exporting Washington apples to Japan.

"It's a double-edged sword," Mr. Pilzer said. "That's why it always self-corrects as long as people don't panic and we maintain free trade and open markets."

While there are several factors contributing to higher food prices, no one is sure of the long-term impact of oil, ethanol and the shrinking dollar at the grocery store.

"The dollar is not going to fall forever," said Josephine E. Olson, professor of business administration at the University of Pittsburgh and director of the Joseph M. Katz Graduate School of Business.

"It eventually is going to increase again, which might help food prices go down."

Tim Grant can be reached at tgrant@post-gazette.com or 412-263-1591.
First published on January 11, 2008 at 12:00 am