Food prices to continue to rise for rest of 2011, into 2012 as processors pass on higher costs of commodities to consumers, says Purdue University agricultural economist

Duncan Martell

WEST LAFAYETTE, Indiana , September 7, 2011 (press release) – Food prices will continue to rise for the remainder of this year and well into 2012 because processors now are beginning to pass along higher costs of commodities to consumers, a Purdue University agricultural economist says.

While world grain stocks diminished amid growing demand, drought and flooding, food prices did not significantly increase for most of 2009 and 2010 even though prices that processors pay for raw ingredients such as corn and soybeans did, Corinne Alexander said.

That is changing.

"The question is not whether costs at the grocery store will increase, it's when," she said.

Higher commodity prices do not always immediately result in higher food prices, Alexander said. The prices of finished food products abundant in the marketplace might not increase substantially, as has been the case this year with cheese.

But when grain supplies are tight as they are now, grocery shoppers eventually will see the increases at the cash register.

Field corn, which comprises most of Indiana's corn acreage, is used primarily for livestock feed, but it also is used for tortilla chips and in corn syrup. Soybeans often are used as ingredient products, such as soybean oil, which is in nearly all salad dressings. Because both grains are in short supply and are used to produce many foods, consumers can expect to see small increases in many different products, Alexander said.

Strong global demand has driven exports, which means less grain stays in the United States. Now, with record-high prices for corn and soybeans and weather that reduced yield potential nationwide for feed grains, Alexander said beef prices likely will rise about 10 percent.

"There is always some time lag between higher feed costs and higher meat costs," she said.

In some parts of the country, it has been too dry for food crops such as wheat to thrive. In other states, the spring's wet weather hindered planting and growth for months.

"Texas, Oklahoma and Kansas are experiencing a massive drought that some are comparing to the Dust Bowl," she said. "With the lack of water, the wheat will likely be behind going into fall, so that means next year's prices will rise accordingly."

Wheat in the northern states was damaged by heavy spring rains. In North Dakota, about 1 million acres of durum wheat - the main variety used in pasta - wasn't planted because of Mississippi River flooding. The short supply will mean higher wheat prices and, ultimately, higher prices on wheat products at the grocery store.

According to the Consumer Price Index, food prices have risen about 3.5 percent this year, with the most substantial increases in the food-at-home category. Consumers now pay about 5.4 percent more than last year for food at the grocery store. Food in restaurants, on the other hand, has increased at a slower rate of 2.6 percent largely because their biggest cost - labor - has been stable in a weak economy.

Consumers are seeing increases in areas besides grain and meats. Coffee prices, for example, are at record highs.

"For consumers, the bottom line is that if the price of coffee is at record levels, if sugar and cocoa are both up, and if milk prices are relatively high, it's going to cost you more to get a mocha," Alexander said.

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