Sushi Money

If it seems like the price of everything at the grocery store keeps going up, you’re not alone. Wholesale inflation has risen at the fastest pace in decades, with a January surge of 7.5 percent over the past 12 months. When wholesale costs rise, so do the prices that consumers must pay of course, and the cost of food is a huge expense for most of us.

“Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.”

In recent years we’ve seen price fluctuations for all kinds of food products. Retail food purchases for consumers is primarily a local event… we shop at the corner store, and shake our head when we see prices for milk, eggs or cereal go up. In the past when I saw higher food prices I thought it was temporary. But over the last year it has become evident that the price of almost all the food we buy has continued to increase.

Here’s a CNBC screenshot from last week talking about essential food ingredient prices. I’m not sure of the data that the American Baker’s Association uses, but they’re saying we could be paying almost $5.00 for a loaf of bread next year!

And why is corn sweetener up there? Because hundreds of food producers use corn sweetener instead of sugar because it costs less. At least historically. Now corn is in high demand for a host of reasons, not the least of which is the production of ethanol.

Agricultural costs have increased tremendously throughout the world, both due to fuel costs as well as global demand. Within the U.S. a lots of folks are citing ethanol production as the primary reason for rising food prices, seeing the diversion and diminished supply of corn as a major factor. Ethanol is a huge factor affecting grain prices, but many experts see the greatest influences from global demand for food coupled with production swings and weather impacts such as drought.

But let’s look at ethanol because it’s a primary agent of influence within the U.S. agricultural sector. Based on USDA estimates, the percent of corn produced and used for ethanol production is going to double, rising from 14% to 30% over the next 10 years.

It’s like a storm of conflicting forces for which we have no easy answer. In effect, we are growing food to eat and to put in our cars! When farmers increase corn production they produce less of something else. In the U.S. that typically means alternating corn for soybeans, and if there’s less supply of one product, that usually results in greater demand and higher prices for it. Based on current global demand, the net effect is rising prices for all agricultural sectors. The USDA’s assessment of the impact of ethanol production presents clear evidence for the food price increases that we’ll see in the years ahead.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs, it will also most likely mean higher food prices for consumers. Retail price increases for red meats, poultry, and eggs are projected to exceed the general inflation rate in 2008-10, as the livestock sector adjusts to higher feed costs. As a result, overall retail food prices would rise faster than the general inflation rate in those years.”

And in a global economy the economic ripples of food supply and demand have far-reaching consequences.

“Most important, a period of protracted higher food prices will be bad news for many of the world’s poorest people and its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa.”

Another USDA article examines how corn production and consumer food prices are related. Although it helps explain commodity price influences, after you read the article it doesn’t seem like the USDA really looks at what’s been going on for consumers, but the research provides some key insight. In the language of academic researchers, the USDA explains that retail competition moderates food price inflation and provides stability:

Overall, retail food prices have been relatively stable over the past 20 years, with prices increasing an average of 3.0 percent per year from 1987 through 2007, just below the overall rate of inflation. The main exception occurred when sharply higher farm prices increased retail prices 5.8 percent in 1989 and 1990. Since then, food price inflation has averaged just 2.5 percent per year.

Retail prices are a function of both consumer demand and the interaction between food manufacturers, distributors, and retailers, with each group having some pricing power in the supply chain.

Well, however stable and whatever the “pricing power” of the supply chain, those of us filling up the shopping cart just see prices going up! Keeping in mind that these charts are 6+ month old data, that inflation spike for the Food CPI has continued to increase throughout 2007 and 2008.

Here’s the heart of the issue:

When there are cost shocks in the food production system due to changes in the commodity or farm product market, most retailers respond by passing on a fraction of their higher costs to consumers.

That about sums it up. We’re going to continue to see food price increases over the next few years, if not the next decade. Agriculture will also be subsized less by the government in the future, which means the increasing costs of production and transportation will be passed on to consumers. Groceries and gas are simply going to stay a lot more expensive over time.

Hence, U.S. consumers are not happy right now. Between gas and food, there are too many increases to prices that the average family sees each day. It will be interesting to see how U.S. consumers change to meet these challenges over time.

What can we do for our own families and at home? I was joking the other day about having our own chickens for eggs, although that would be pretty cool if I didn’t have to shovel you-know-what. We’ve already got too many pets as it is. But we can grow and make more food at home! If you’ve had a garden before, you know it provides a lot of home-grown food for comparably little effort (although it does take effort!). A few packs of seeds or plant starts and some TLC, and you can have a bunch of fresh vegetables. Honestly, there are few things to rival the enjoyment of eating food you’ve grown and prepared yourself. Sustainable living is going to take on new meaning for a lot of people.

Personally we’ve begun to change how we shop for food, as well as prepare food at home. As we gear up for the spring and summer gardening season my wife has been baking whole-wheat bread at home. It’s really very good, and costs about half as much as quality store-bought bread (No, you can’t compete with plain squishy white bread by making it at home… unless you’re using paper- but then again it might provide about the same nutrition!). And yes, there is the time involved in preparation, but with a little planning it still saves money and is a lot more rewarding.

Does it really make a difference financially? Yes! It saves dollars and helps foster a mindset of controlling costs and producing more at home. Admittedly it’s hard to make a real dent in the overall finances without a concerted effort though, and that’s something a garden really helps with. Frugal shopping, buying in bulk, staying healthy… it all adds up to lower costs over the long run.

So we’re reading and learning about new ways to save and do more at home. What do you do at home that makes a difference in your financial lives?

For investors, lots of smart folks have jumped on the commodity bandwagon over the past year. Between natural resource and commodity stocks and funds, investors have made a small fortune over several years. I was big into natural resources and energy stocks from ‘02 to ‘05 and then pared back my holdings. That was a mistake for which I then proceeded to miss a lot of the continuing advance. I haven’t changed my core retirement portfolio of balanced stocks/bonds for the long-term but will look a little more closely at commodities going forward. Many professionals believe there is a lot more room for the commodity bull to run and the data at present backs up that view.

For an excellent assessment of our current economic challenges, Money and Markets provides a sobering assessment in Three Great Investment Opportunities and One Grave Danger For Your Portfolio. If that’s not enough to motivate someone to re-think investment goals and tuck away some extra savings, then I don’t know what is.

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