Flood of Higher Food Prices Imminent

Articles
November 03, 2010

Flood of Higher Food Prices Imminent

To show consumers value and win trips, retailers have absorbed higher food costs since this summer and set up, in effect, a price dam.

To show consumers value and win trips, retailers have absorbed higher food costs since this summer and set up, in effect, a price dam. The dam is about to burst after Election Day, however, due to hikes in commodity prices for animal feed (and therefore beef, pork and poultry prices) and ingredients in packaged products throughout the supermarket.

The Lempert Report expects food prices this holiday season to be the highest they’ve been in years because of developments in recent weeks:

  • The U.S. Department of Agriculture slashed its harvest forecast for corn, soybeans and wheat, due in part to hot, rainy weather in late-summer. The 3.8% projection cut in corn was the largest in bushel terms in more than 30 years, Rich Feltes, vice president-research at broker R.J. O’Brien told The Wall Street Journal.
  • Adding to the pressure, the Environmental Protection Agency said the share of ethanol blended into fuel could rise to15%, up from 10%.
  • The wholesale prices of tom turkeys are up 15% vs. a year ago, wholesale cattle prices are up 13.5% and broiler chickens are up 7%, J. Patrick Boyle, president and CEO of the American Meat Institute, told the San Antonio Express-News.
  • The U.S. is having a banner year on the global stage as the world’s largest wheat exporter.

How people will react to this price flood is an open question. Holiday meals, after all, are some of the special occasions each year where families don’t want to skimp. The Nielsen Co. predicts flat spending vs. 2009, with dollar stores capturing lower-income shoppers and online sites attracting upper-income shoppers.

Yet The Lempert Report suspects people might spend more generously if the Dow Jones Average continues its ascent through the end of the year, and perhaps if Republicans take over the House and promote fiscal conservatism. To many, these would be signs for optimism despite stubbornly low house prices and stubbornly high unemployment rates.

One risk: if fuel price hikes accompany food price hikes and spur inflation, the Federal Reserve may need to raise interest rates. That would add to consumers’ emotional volatility, which could well dictate this holiday season.  We feel that by raising prices now that retailers and CPG manufacturers are counting on the public’s desire to have as ‘normal’ a holiday period as possible. 

Meanwhile, General Mills, Starbucks and McDonald’s have already announced selective price hikes, though it’s understandable why they and others have held off so far. Brands are looking over their shoulders at private label encroachment, and conventional supermarkets are in pitched battles for trips with lower-margin supercenters, dollar stores, wholesale clubs and extreme-value operators such as Aldi, Grocery Outlet and Save-A-Lot.