Monday, March 10, 2008

Surging Costs of Groceries Hit Home

Surging Costs of Groceries Hit Home

By Robert Gavin

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Bread, eggs, milk prices up sharply.

American families, already pinched by soaring energy costs, are taking another big hit to household budgets as food prices increase at the fastest rate since 1990.

After nearly two decades of low food inflation, prices for staples such as bread, milk, eggs, and flour are rising sharply, surging in the past year at double-digit rates, according to the Labor Department. Milk prices, for example, increased 26 percent over the year. Egg prices jumped 40 percent.

Escalating food costs could present a greater problem than soaring oil prices for the national economy because the average household spends three times as much for food as for gasoline. Food accounts for about 13 percent of household spending compared with about 4 percent for gas.

Rising food prices can be particularly corrosive to consumer confidence because people are so frequently exposed to the cost increases. "It's the biggest risk we face economically, and it might be the thing that does us in," said Rich Yamarone, director of economic research at Argus Research Corp. in New York. "There's nothing really worse than having a job, making money, and forking most of it over just so you can have the same amount of food. You're running in place, and it really weighs on you."

As with energy, higher food costs cut into discretionary income that buys everything from cars to computers to movie tickets and drives the consumer-based US economy. Falling home values and a faltering stock market have battered consumer confidence, spurring a retrenchment in spending that is contributing to recent job losses and pulling the economy toward recession.

Many analysts expect consumers to keep paying more for food. Wholesale food prices, an indicator of where supermarket prices are headed, rose last month at the fastest rate since 2003, with egg prices jumping 60 percent from a year ago, pasta products 30 percent, and fruits and vegetables 20 percent, according to the Labor Department.

"No retailer can absorb cost increases indefinitely," said Laura Sen, president of BJ's Wholesale Club, the Natick chain of discount warehouse stores. "Given what we are seeing, all retail channels need to raise prices, and from our observations, are doing so."

Amy Brnger, 43, of Portsmouth, N.H., just needs to look at her grocery receipts. For a long time, feeding her family of three used to cost around $125 a week. Suddenly this winter, her bill leaped to about $200.

Quickly, Brnger, a school counselor and mother of a 9-year-old daughter, looked for ways to save. She buys fewer organic products, which can cost twice as much as conventional goods. Instead of buying chicken breasts, she buys whole chickens and cuts them into parts, saving about $2 a pound. She buys dried beans, instead of canned. And she is baking her own bread.

"I can't believe a loaf of bread is like $4," she said. "I'm just being a lot more conscious of buying things."

Several factors contribute to higher food prices, analysts say, but none more than record prices for oil, which last week closed above $105 a barrel. Oil is not only driving up production and transportation costs, but also adding to demand for corn and soybeans, used to make alternative fuels such as ethanol and biodiesel.

As a result, corn prices have more than doubled in commodity markets over two years, and soybeans nearly tripled, according to DTN, a commodities analysis firm in Omaha. Meanwhile, with poor harvests in major wheat-producing regions, wheat prices have more than tripled.

These crops have a profound impact on food prices because they form foundations for many products, including oils, sweeteners, and flour. Corn, for example, is a key ingredient in livestock feed. When the price of corn rises, so does the price of feed, and ultimately, so do the prices of meat, poultry, and eggs.

Darin Newsom, senior analyst at DTN, said the same dynamics pushing oil prices to new highs are at work in agricultural commodities. They start with strong global demand, growing as living standards improve in developing nations such as China and India and food consumption increases.

The weak US dollar, at or near historic lows against the euro and other currencies, adds more pressure. Oil and other commodities trade in dollars, so when the dollar is worth less, producers demand higher prices to make up for the loss in value. This pressure raises inflation fears, which in turn make commodities attractive to investors, who view them as holding value during inflationary periods. As investors buy, demand grows and commodity prices go even higher.

This combination of a weak dollar, soaring energy prices, and global demand recalls the 1970s, when retail food prices rose an average of nearly 9 percent a year, said Bill Lapp, president of Advanced Economic Solutions, an Omaha research firm. Over the past year, Lapp said, food prices rose nearly 5 percent, more than double the average rate of the previous 10 years. Prices will rise even faster the next five years, he forecasts, increasing at an annual rate of 7.5 percent.

"Much as we saw in the '70s," he said, "these sharp increases are going to be sustained."

The US Department of Agriculture forecasts overall food prices this year will rise about 4 percent, about half Lapp's forecast, but still faster than recent years.

Anthony Conti, executive vice president at Agar Supply Inc., a Taunton food distributor, said there is little doubt consumers will continue to pay more. "Every day we get notices from manufacturers that prices are going up," he said.

Agar sells to supermarkets, restaurants, and other outlets, and it is paying some of the highest prices ever, Conti said. Cheese prices have doubled from a year ago, and beef prices have risen more than 50 percent. On top of these costs, Agar is paying about $3.70 a gallon for diesel - more than $1 above last year's prices - for a truck fleet that travels about 4 million miles per year.

It all adds up to even higher prices in grocery aisles and restaurants as costs get passed down the supply chain. Barb Phillips of Medway, for example, said the price on a case of formula for her 7-month-old son recently jumped from $32 to $38. Phillips, a loan processor who earns less than $40,000 a year, said she has stopped buying snacks and fresh produce for herself because prices are too high and stretches her meat purchases by making soups and stews.

"Everything just keeps going up," said Phillips, 41. "It's all really grim."

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