Food inflation may skyrocket
Americans may be getting another helping of food inflation, and it seems likely to come from higher prices for chicken and pork.
Overall food inflation could double this year, lifted by the rising costs of fuel, corn and soybeans, some analysts predict.
Food inflation hit 4 percent last year, up from 2.4 percent in 2006. While beef prices were already high, chicken and pork prices didn't reflect record costs for feed and fuel. That's poised to change as chicken and pig producers who have been losing money slaughter more animals to decrease the supply and raise the prices they can charge.
Higher food inflation would further challenge shoppers who are already limiting themselves to sale items and store brands as they contend with the worst food inflation since 1990.
Mary Lee Rydzewski, a retired Amtrak engine dispatcher who lives in Cheshire, Conn., says she has already switched to store brands and sale items because of higher food prices. If they increase more, she plans to cut back again.
But Karen Leedahl, a pastor who lives in Latrobe, Penn., said she always bought store brands and shopped for sale goods. Two weeks ago, she started walking more than a mile round-trip to the grocery store instead of driving.
If prices increase more, "I'm kind of in trouble," she said. "I was already trying to save."
U.S. shoppers spent 5.8 percent of their income on food in 2006, according to the U.S. Department of Agriculture — a lower proportion than any other nation. In the United Kingdom, consumers spent 8.7 percent of their income on food, and in most of the world it's at least 10 percent.
But the U.S. portion seems certain to rise, as chicken and pig producers say prices have to go up as feed costs increase.
"American consumers are only just beginning to feel the impact of sharply higher food prices," said Pilgrim's Pride Corp. Chief Executive Clint Rivers. The nation's largest chicken producer posted a wider quarterly loss Monday as it paid more for feed and took a restructuring charge.
Tyson Foods Inc., the world's biggest meat producer, forecasts that its expenses will rise $1 billion this year, including $600 million for corn and soybean meal and $100 million on grain. The balance will come from higher prices for cooking oil, breading and fuel costs, the company said. Last week Tyson reported a $5 million second-quarter loss and withdrew its earnings outlook, saying feed prices were too volatile.
"I think food inflation has got to go up," said C. Larry Pope, president and chief executive of Smithfield Foods Inc., the world's largest pork producer, in a recent speech. "Everything that uses wheat, everything that uses corn, everything that uses corn syrup has got to go up."
The exception may be beef, as already high beef prices may not see the increases that chicken and pork could, said Jim Hilker, an agricultural economist at Michigan State University. "I'm not sure beef prices will go up a lot, but they won't come back down."
Pork farm losses, though, may total $3.8 billion for 2008, one-quarter of total production, according to Chris Hurt, an agricultural economist at Purdue University. He calls the industry "a financial disaster in progress."
It will be easier for publicly traded meat producers to weather a money-losing quarter than for farmer Bill Tentinger in LeMars, Iowa. Tentinger said he expects to spend $85 per hundredweight feeding his hogs this year; at current levels, they will fetch prices in the mid $40s.
"Take that figure, times 10,000 hogs, and see if you can eat breakfast decent in the morning," said Tentinger, 59.
The biggest driver to prices is grain costs, which have been affected by the rise in ethanol production and strong export demand due to the weak dollar. Corn costs have more than doubled over the last two years from $2.50 a bushel to $6. That has added $6 billion to chicken farmers' annual feed bills, according to the National Chicken Council, a trade group.
As a result, companies are slaughtering animals to tighten supply. The move will temporarily increase supply, lowering prices, but as farms herds and flocks get smaller, it will raise prices.
Fieldale Farms Corp., a privately held chicken producer, is cutting its production by 5 percent starting in the middle of the month. Tom Hinsley, senior vice president, said he expects higher chicken prices by midsummer.
"They will have to rise, big-time, otherwise, there will be no chicken," Hinsley said.
Pilgrim's Pride said it plans to reduce weekly chicken processing by 5 percent in the second half of the year, and keep production down until margins improve. Smithfield said in February that it would slaughter 4 percent to 5 percent of its breeding sows.
A smaller breeding population and a wave of expected hog farm failures will boost pork prices by 2009, Hurt predicted. He estimates 6 percent to 8 percent of breeding sows will need to be slaughtered to support prices.
The government is giving pork producers a hand by taking some pork off the market. Agriculture Secretary Ed Schafer last week announced a government plan to buy up to $50 million of pork for child nutrition and domestic food assistance programs — at the urging of the National Pork Producers Council.
For Tim Bierman, a third-generation farmer in Larrabee, Iowa, pork price increases can't come soon enough.
Bierman spent a recent morning alternately calling and texting his commodities broker from the seat of his tractor, trying to cut the loss he'll take on his 9,000 pigs by hedging the cost of feed on the futures market.
"We're trying to cover ourselves on the futures, if not to turn a profit, then to lose less than we would if we did nothing," said Bierman, 47.
Meat and poultry executives have also come out against federal ethanol mandates, which they say are driving the cost of corn higher. On Monday, Senate Republicans asked environmental regulators to halt the ethanol expansion plans amid the rising food prices.
The U.S. Department of Agriculture predicts overall food prices could increase another 4 percent to 5 percent in 2008. But consultant Jim Hertel, of Willard Bishop food retail consultants in Barrington, Ill., thinks that high commodity and fuel prices, plus demand from India and China, could push food inflation anywhere from to 7 percent to 10 percent.
Hertel is counseling his grocery store clients on price-increase strategies. One piece of advice — don't make your store brands too cheap. Shoppers who buy them are looking for a 20 percent discount, so stores that price them 30 percent cheaper are losing money.
"We haven't seen hard-core food inflation for 30 years," he said. That's not only a challenge for shoppers, it's a challenge for retailers, he said. "A lot of people who knew what to do, who learned their lessons in the late 70s or early 80s, they're retired at this point, if they're lucky."