Thursday, March 20, 2008

Sticker shock: Food prices surge

Robalini's Note: Food prices, another victim of the subprime disaster...

Sticker shock: Food prices surge
By Mark Schwanhausser
Mercury News

With food prices climbing far faster than inflation - and many staples rising at double-digit rates - some consumers are starting to ask themselves if they need to tighten their belts, both literally and figuratively.

Flour, milk and eggs are each up at least 24 percent for the year ending in February, about 10 times the inflation rate over the same period, according to the Consumer Price Index. Whole wheat bread and cheddar cheese are up 15 percent each. And chugging down a 2-liter bottle of soda will set you back 14 percent more.

Food prices on average have risen less than inflation since 1987 - and just 2.7 percent since 2000. And there was a sigh of relief Friday when the Consumer Price Index showed that increases in the overall cost of food slowed in February.

But economists worry that powerful forces are fueling higher food prices - from the cost of oil and ethanol production to the weak dollar and global demand for food products. And they're not likely to abate anytime soon.

Despite the price relief in February, "it would be hard to see food prices being anything less than 4 percent higher overall for the year," said Ephraim Leibtag, a U.S. Department of Agriculture economist.

That scenario would only compound the financial pressure on consumers as the nation slips closer to recession, layoffs mount, home values slump and banks slow the flow of credit. Rising food prices simply provide Americans with daily reminders that their food dollar isn't stretching as far.

You don't need to tell that to Mary DaRosa. Earning $17,000 a year as a school crossing guard and from three other part-time jobs, the 49-year-old San Jose woman said she shares a rented mobile home with her daughter and patiently waits for grocery sales. Rather than paying $4 for a loaf of bread, she buys four loaves when bread is marked down to 99 cents each.

Pointing to a few plastic bags in her shopping cart at a PW Market on Friday, she said, "Today, I spent 30-something dollars - and it will last me three weeks."

But other shoppers are less sensitive to prices. Unloading a shopping cart at PW that was piled high with $200.92 worth of groceries Friday, Lan Smith, 47, said she had taken little notice of rising food prices until her mother said a few months ago that she'd stopped buying eggs because they were too costly. The topic arose again when Smith and her friends were baking goods for a Second Harvest Food Bank fundraiser before the holidays. Smith said she looked for egg sales at Safeway, while friends hunted for deals at Costco and Longs Drugs.

For Smith, though, rising food prices are mostly an annoyance - especially compared with what it costs to tank up her Jeep these days.

"I don't think anything will keep me from paying for eggs when I'm paying $3.75 for gas," the San Jose woman said.

Several forces are fueling rising food prices, economists say. Not surprisingly, the main one is the price of oil. But that issue goes back before the recent spike in crude prices, which pushed a barrel of oil above $110 for the first time last week and is ratcheting up the cost to process food, transport it to distribution centers and stores, and refrigerate or heat it at the grocery.

Part of the inflationary pressure is an unintended consequence of the nation's push to develop alternative fuels, notably ethanol made from corn. Demand for corn was so strong that farmers made a dramatic shift last year to grow corn rather than other crops like soybeans. By the end of the 2006-07 crop year, 19 percent of the harvested corn crop was made into ethanol - a 30 percent increase in just one year. The increased demand for ethanol helped boost the price of a bushel of corn from $2 in 2005 to $3.40 in 2007.

The ripple effects were widespread, Leibtag said. For one thing, diverting corn to produce ethanol pushed up the price of corn that ranchers feed to livestock and poultry. But it also shrunk the supply of soybeans and other commodities, pushing prices of those staples up, too.

Then the mortgage meltdown triggered the credit crisis in August. And ever since, the Federal Reserve has been slashing interest rates and pumping money into the markets to lubricate the economy. However, those efforts have only sent the dollar plummeting in value.

That made commodities like oil more expensive - adding at least $25 to the price of a barrel of oil, according to Nick M. Bennenbroek, who heads currency strategy for Wells Fargo Bank in New York. But it also boosted the buying power of developing nations like China, which have bid up the price of agricultural products and food products.

"It's clearly not very good news for an economy that's struggling anyway," Bennenbroek said. "While we believe the dollar is cheap and doesn't have much of a way to go but up, we have delayed the liftoff for the dollar until late 2008."

Contact Mark Schwanhausser at or (408) 920-5543.

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