"Get used to higher food costs": experts

CHICAGO Tue Mar 15, 2011 7:09pm EDT

CHICAGO (Reuters) - Higher food prices are here to stay.

A rising tide of global forces is supporting the surge in prices for important food staples like meat, dairy and grains, commodity experts said at the Reuters Global Food and Agriculture Summit on Tuesday.

"This is a pretty sustainable increase ... A number of factors have been building over time in terms of the commodity increase: world economic growth, rising crude oil prices, increased Chinese import demand all have conspired," said Bill Lapp, president of Advanced Economic Solutions, a commodity analytical firm based in Omaha, Nebraska.

"The weak dollar aided and abetted by (Federal Reserve) Chairman (Ben) Bernanke's quantitative easing program has been a part of this as well," said Lapp, who added that since July, incremental expenses for commodities going into food production are approaching $40 billion.

"These costs do have to be passed on to consumers if there isn't any relief in commodity prices. To date we have not seen that," said Lapp, previously a vice president of economic research for ConAgra Foods.

U.S. corn, wheat and soybeans recently have escalated to near-record as strong demand and severe weather cut world grain stocks. Beef prices hit a 7-1/2 year high on Tuesday amid a jump in feed costs, shrinking cattle numbers and big export sales.

"Assuming we're going to have a normal crop this year, and chances I don't think are high for that, and potentially increased demand in Asian markets, I think it's going to be a couple of years before we get out of this cycle," said Jim Prokopanko, Chief Executive of Mosaic Co (MOS.N), the world's second largest fertilizer producer.

"EYE-POPPING' INCREASES"

Prices for meat, dairy and fresh fruits and vegetables, which fluctuate with market forces, are already seeing "eye-popping" increases, said Janney Capital Markets analyst Jonathan Feeney.

Producers of fresh items are "not giving any apologies when prices are going up because they don't get any apologies when prices are going down," Feeney said.

Anywhere from 4 percent to 17 percent of a U.S. shopper's income goes to food, he said.

Packaged food makers, who are able to lock in purchases for some items over certain time periods, have been able to delay some increases because they are "living on their hedges," Feeney said.

Those prices will eventually head higher as "all hedges eventually end," Lapp added.

David Garfield, managing director of the consumer products practice at AlixPartners in Chicago, said: "We definitely think that cost pressures on the producers are durable ... The cost pressure is not going away, the question is 'what can you try to do to combat that?'"

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Comments (1)
LuisdeAgustin wrote:
Good capture of the situation, with rare inclusion of the Fed’s quantitative easing as a significant cause for rising commodities prices and food prices in particular.

Major media assessment neglects this most important factor for the sensitivity of food prices: massive evidence that it’s due to the colossal depreciation in the dollar these past 10-years, according to research by David Ranson, head of research at Wainwright Economics. The trend has been current nearly a decade, when Ranson first wrote and warned about its development. Unfortunately the trend and consequences of the sliding US currency continues.

It’s a troubling issue, tragic for many parts of the world that spend a disproportionate amount of income on essential commodities globally priced in US dollars, thus almost certainly bringing unmitigated suffering essentially the result of a US weak dollar policy that the US views as politically advantageous and financially net positive.

As world food price inflation takes geopolitical center stage, investors are worrying about the ability of major countries like Saudi Arabia and China to ride out the storm of public discontent. The frightening upward trend in food prices is only one symptom of a general price rise in commodities that, ironically, has been enriching many emerging countries that possess large reserves of raw materials.

Inflation in itself is not a reason to be bearish about emerging markets. In fact, commodity driven inflation is a reason to be bullish for those countries that have these raw material reserves. But there is a paradox. Some countries suffer chaotic regime change while stock markets in many other others perform well.

It’s a divisive event, enriching the well-to-do while further impoverishing the poor. Contagion is not the issue. The root of the crisis is not a virus that leaps from one regime to another. The integrated world market for food sets common price levels for everyone, and the crisis is much more akin to a pandemic in which political stability, including Europe’s, is threatened everywhere simultaneously. The point is, currency instability is socially divisive – an unintended consequence of the floating exchange rate regime we live in and which the US has been abusing.

Diagnoses of world commodity inflation are constantly debated in the media, and some even suggest that food prices are a bubble and that the crisis will blow over. Very few commentators seem to realize that high food commodity prices are chiefly the result of an enormous decline in the dollar, because it’s the dollar in terms of which prices are expressed. Commodity inflation is simply the mirror image of currency depreciation. Everything else pales by comparison. Our policymakers certainly do not perceive this.

It’s astonishing if not unbelievable that Fed chairman Ben Bernanke recently denies any connection between inflation in emerging countries and the economic policies of the United States. Given that US policymakers are so willingly unprepared to learn from the crisis, the US cheap dollar policy will likely stay. And that, in turn, is going to continue driving food and other commodity prices upwards. The upheavals this chain reaction brings to the emerging world will become ever more dangerous.

It’s terrible to think what’s ahead for the belly of much of humanity. Should this blunt tax remain unmitigated, wealthy societies may withstand the additional pain; however, food importers whose food expenditure consumes a third or more of meager family income may be in for plague like times. The United States, “the indispensable nation,” magnanimous noblesse oblige to the world, appears callously unconcerned about its premeditated and ill-conceived self-serving weak dollar regime.

Luis de Agustin

Mar 19, 2011 8:20pm EDT  --  Report as abuse
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