Weathering The Storm Of Higher Food Prices

Nasty weather patterns -- including drought in the U.S. Midwest, too much rain in Brazil and a heat wave in Russia -- caused food prices to jump 6% worldwide in July after three months of decline, according to the United Nations Food and Agriculture Organization. Just how much to pass along rising commodity prices is a delicate balancing act for manufacturers and retailers, made all the more difficult by the just-as-nasty economic picture.

Although the U.N.’s index, which measures the export prices of food, is 10% below its February 2011 record, officials worry that the problem could get worse if governments “react to tighter food supplies by curbing food exports or hoarding, which would feed further price increases as buyers scramble to secure stockpiles,” Liam Pleven reports in the Wall Street Journal. While export prices don’t necessarily affect retail, “analysts expect the fallout to hit consumer pocketbooks, including rising middle classes in emerging markets where meat consumption has increased,” he writes.

“As food prices spike, how close is the world to another crisis?” asks Brad Plumer in a Washington Post blog. The good news is that things aren’t nearly as bad as they were in 2008 –- a crisis “driven, in large part, by record-high oil prices that hurt all aspects of industrial agriculture, from fertilizer to operating farm machinery to food transportation.”

But the U.N.’s FAO Cereal Price Index was up 17%, or 38 points, from June -- 14 points below its all-time high of 274 points in April 2008. 

“World leaders must snap out of their lazy complacency and realize the time of cheap food has long gone,” says Oxfam’s Colin Roche. That means, he says, addressing climate change more aggressively and scrapping biofuel programs. “These price hikes are being driven by more than just a drought in the U.S. corn-belt and problem harvests elsewhere,” according to Roche, who added, “Our food system should be more resilient than this.”

The Orlando Sun-Sentinel’s William E. Gibson warned his readers earlier this week that they were likely to pay 3% to 4% more for groceries next year as a result of the drought, as the Dept. of Agriculture forecasts nationwide. As grain prices rise, the cost of feeding livestock will, too. There could be considerable impact on consumers’ habits.

“Some meat-eaters may turn to more of a vegetarian diet, food market experts say,” writes Gibson. “And the price spike next year likely will reinforce cost-conscious trends begun during the Great Recession, which prompted many consumers to rely more on discounts, coupons and lower-priced store brands while learning to live with less.”

So far, companies are evidently not feeling the pinch. Nestle’s yesterday reported growth for the first half that beat analysts’ estimates in part because of price increases, Bloomberg reports. “Higher prices led to sales gains of 5.7% in the Americas and 2.4% in Europe, as volume in the regions was little changed,” Dermot Doherty writes. The company forecasts raw-material price inflation in the "low to mid single-digit" range for 2012.

Should you ask the weatherman which way the winds are blowing, the “outlook appears grim,” write Reuters’ Catherine Hornby and Karl Plume. “While mature U.S. summer crops are now mostly immune to worsening drought conditions, crucial harvests in places like India and Australia could be endangered by El Nino, which typically curbs rainfall.”

The New York Times’Stephanie Clifford, meanwhile, has a piece this morning about retailers who are offering different prices to shoppers based on what they discern from their loyalty cards. The price of a 24-pack of Refreshe bottled water is $2.71 for a woman at a Safeway in Denver who is a likely prospect to become a steady user, for example, and $3.69 for a woman who is not.

Over time, Clifford writes, personalized pricing could displace standardized price tags despite the specter of privacy concerns among some consumers.

“If our consumer information is right, personalization is really a consumer desire right now, not so much a consumer fear,” says Michael R. Minasi, president for marketing at Safeway. 

Setting the right price “comes down to understanding elasticity at a household level,” says Stuart Aitken, CEO of dunnhumbyUSA, a personalization consultancy.

But with headlines such as “Countries' Panic Buying May Worsen Food Price Spikes” catching eyeballs around the world this morning, it’s clearly a global issue.

Tags: food
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2 comments about "Weathering The Storm Of Higher Food Prices".
  1. Paula Lynn from Who Else Unlimited , August 10, 2012 at 11:20 a.m.
    If profits rise via increased costs blamed on poor crops, then the high food costs are partly artificial aren't they ?
  2. Susan Von Seggern from SvS PR , August 10, 2012 at 1:01 p.m.
    Let's hope the worst effect is a 5% hit at the grocery store. The real worry is the global unrest rising food prices could unleash.