Crop Prices: A Recessionary Pressure?

Last Thursday’s (2/14/08) WSJ ran an article about the rising cost of wheat (and things like corn and soybeans), the impact it’s having on food producers, and the solutions some are proposing to the problem. Some food producers have seen the cost of key ingredients rise by as much as 300% over the past year, and earnings for major food companies like Kellogg (K) and Kraft (KFT) have taken a hit. In fact, a lot of the increases have come over the past four months as Wheat prices on the Minneapolis Grain Exchange have increased by over 125% since November.

From the WSJ:

Over the past year, corn and soybean prices hit records. Now, wheat prices are on a tear. On the Minneapolis Grain Exchange, hard red spring wheat closed at $17.63 a bushel yesterday, up from $4.92 a year earlier. In the cash markets, some farmers are fetching more than $20 a bushel. Many farmers are sitting on their grain, waiting for the price to go even higher, exacerbating the jump in prices.

Wheat prices have risen so swiftly that bakers can't adjust their prices fast enough to offset the impact, said Len Amoroso, executive vice president of Amoroso's Baking Co. in Philadelphia. "We are talking about prices that are just unheard of," he said. Tuesday, Mr. Amoroso said, he was quoted $48 per 100 pounds of flour from hard red spring wheat, which he uses to make sandwich rolls and other products. A year ago, he paid about $14.60.

Whether Washington acts may depend on how much consumers are affected. Already, prices have risen for everything from steak to pasta. Food prices rose about 5% in the U.S. last year, the highest rate since 1990, while overall inflation rose by about 4%. Some analysts expect food inflation to rise faster this year.

The average retail price for whole-wheat bread rose 12% to $1.78 per pound in November from a year earlier. Last month, food giants Kraft Foods Inc. and Kellogg said fourth-quarter profits declined because of higher ingredient costs.”

After reading the article I began to wonder if food costs are the “recessionary & inflationary hobgoblin” no one is really thinking about, as higher food prices could really begin to put a severe strain on household budgets in the future. If we think about gas prices in 2000 – 2001 they were just beginning to inch up and people were complaining about $1.27 for a gallon of gas, now look at where we are now: people get happy when gas dips below $3.00/gallon. Are food prices in 2008 in a similar place as gas prices in 2001, with respect to present day increases being just the type of the iceberg? If this I true, what happens to the economy when the price of food continues to escalate?

Rising food prices could put a lot of strain on household budgets as far as the money spent on discretionary items and on the earnings of restaurants, big grocery chains and food producers big and small. While the food price problem is oft discussed and is well documented, not a lot of thought has been given to the impact of rising food costs on the economy with respect to helping to cause, prolong or merely exasperating a recession.

Sources:

The Wall St. Journal: “More Grain Production Sought” – Lauren Etter and David Kesmodel, February 14, 2008.

All graphics courtesy of the Wall St. Journal

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Comments

[haydete]

If you refer to an article that you authored, you could perhaps arange that readers see it without needing a subscription. Or don't use it as a reference and repeat the highlights here.