Why are food prices going through the roof?

Denise Brand, 54, of Wesley Chapel opens a bag of Craisins she bought from Sam’s Club while making dinner for herself and her husband, Christopher, 54, last week. “We buy in bulk and freeze it,” said Denise, who said she has noticed an increase in food prices.

KERI WIGINTON | Times

Denise Brand, 54, of Wesley Chapel opens a bag of Craisins she bought from Sam’s Club while making dinner for herself and her husband, Christopher, 54, last week. “We buy in bulk and freeze it,” said Denise, who said she has noticed an increase in food prices.

Denise Brand took action once she realized just how much food prices are soaring.

A longtime Publix loyalist, she hits a Wal-Mart Supercenter occasionally to save money. She heads directly to the buy-one-get-one-free aisles and zeros in on less expensive store brands. To cut down on restaurant meals, her 24-year-old daughter, Sarah, freezes four home-cooked meals a week.

"Most significantly, my husband agreed to eat leftovers for dinner," said the 54-year retired guidance counselor from Wesley Chapel.

Shoppers and food marketers have changed their behavior to cope with rising food prices, which last summer began growing faster than the economy for the first time since 1990. Food-price inflation is forecast to stay at record highs through 2008, possibly longer.

Food prices were up 5.2 percent across the South as of Feb. 20, compared to a year earlier. The U.S. Department of Agriculture forecasts price increases will ease up, growing 4 to 4.5 percent this year.

"But they are moderating only because in the second half we'll bump into comparisons to high prices from a year ago," said Ephraim Leibtag, senior economist with the USDA Economic Research Service. "There is not much more the consumer can absorb. But if we get a new round of higher oil prices, food prices will take off again this year and well into 2009."

The three driving forces of soaring food prices have not changed:

• Global demand for food exceeds supply, while the devalued U.S. dollar has lost buying power.

• Higher oil prices that hit all motorists in the pocketbook are jacking up the cost of food packaging, distribution and refrigeration.

• A federal decision to double the U.S. corn crop and divert more of it to triple ethanol production by 2010 lit up corn prices like a Roman candle. Corn in the form of high-fructose syrup is in just about everything these days. But the ethanol decision unleashed commodity price spikes for other grains while American agribiz rearranges acreage dedicated to different crops. Wheat prices, for example, tripled in the past 10 months, causing sleepless nights for everything from pastry shops to pizza parlors.

Dining out on the decline

Consumer backlash to higher prices and stagnant incomes is starting to change consumer behavior. Sales of cheaper, store-brand foods have grown so quickly that prices for those labels have risen faster than those of branded goods, narrowing the 20 percent price savings gap by a few percentage points, says Information Resources Inc., or IRI. About 63 percent of shoppers consciously try to resist impulse buys. Shoppers last year trimmed their annual shopping trips to 164, down from 170 in 2006, according to A.C. Nielsen, the market research firm.

For the first time in 27 years, Americans spent more on food to be eaten at home than away from home in 2007. The number of meals eaten away from home at places like restaurants slipped to 205 from 207.

"Much of it's to save money," said Harry Blazer, who studies the restaurant industry for NPD Group and notes the only increases in restaurant sales have been from higher prices. "But there's a generational change, too. More young people eat at home because spouses share the cooking. Unlike baby boomers, there are more people working at home and stay-at-home moms."

Floridians bought less fluid milk in 2007, a year in which milk prices achieved liftoff.

"That's the first time that's happened in my 20 years in this business," said Joe Wright, chairman of the state's biggest milk cooperative and an Avon Park dairy farmer. "The cost of everything we touch has gone up: feed, fertilizer, fuel, chemicals."

He even plants 400 acres of corn on his 1,700-acre spread for feed three times a year.

Welcome to the front lines of the debate about whether we are in a recession. Consumer spending, which constitutes two-thirds of the economy, declines in recessions. Supermarkets have erupted into a raging tug-of-war between squeezed consumers and grocers and manufacturers wrestling to bump up prices to swallow food-cost inflation.

Raising prices is treacherous business. A 10 percent increase reduces sales volume 13 percent, says Hoss Trabrizi, a senior analytics executive with the Chicago research firm IRI.

Strategies are all over the board. Manufacturers are shrinking package sizes to hold prices. Many products such as Miracle Whip are switching from glass to cheaper plastic bottles. Makers of liquid detergents rolled out concentrated versions to cut packaging and keep the savings.

Food prices normally fluctuate all the time. So grocers rely on higher prices of some products being offset by lower prices on others. For instance, this week banana prices jumped thanks to bad weather in Honduras, but that's been offset by a surplus of strawberries.

For the past eight months, however, the commodity prices for virtually all foods have been rising in lockstep.

"So you try to create a soft landing for your customer" by easing them into paying more, said Steve Smith, vice president of merchandising at Sweetbay Supermarket, a 106-store Tampa chain. "When the cost of everything is up, you try other magic."

Pressure on grocers

Grocers have been eating about a third of commodity price increases by being more efficient or productive. They keep price increases small and frequent. They hold the line on items people notice, like pet food or bread, while raising prices more on less noticeable frozen dinners or cereal. Loading up on inventory is inefficient for profitability. But if it means holding a price longer than a rival, grocers jam warehouses with big volume deals.

Hundreds of little details that help them shave costs add up. Publix Super Markets Inc. changed delivery routes so trucks make more stops but carry full loads. Sweetbay in January prodded clerks to double-check for forgotten items left but not rung up in the "bottom of the buggy." Potential profit payoff: $2-million a year.

"We're seeing bigger store coupons good for an entire purchase to get a return trip," said Ralph Hinson, business development director at Catalina Marketing Corp., a St. Petersburg promotions distributor that tracks sales in half the nation's supermarkets.

Publix has been putting $5 store coupons in some print ads. Winn-Dixie issues $10 coupons at checkout to loyalty card holders who spend $50 on the next trip.

Packaged product makers that maintain sales volume while raising prices are rewarded with higher stock prices.

"In past recessions, consumer staples companies have done better than any industry except utility stocks," said Bill Percoriello, a securities analyst with Morgan Stanley.

But others see long-term implications of changed consumer behavior.

"I don't see energy prices coming down or a lot of these other forces easing up," said Thom Blischok, a futurist with IRI. "I think we've entered a transition period when people rethink how they spend and where they shop."

Mark Albright can be reached at albright@sptimes.com or (727) 893-8252.

What's driving up food prices

Global demand for food exceeds supply as the declining value
of the dollar undermines Americans' buying power.

Federal moves to divert and more than double the corn crop to be used
for ethanol production by 2010 sent prices skyrocketing for soybeans and
grains like wheat until acreage can be adjusted. Corn is an ingredient in most foods. It's also half the cost of raising a chicken and 40 percent for a steer.

Oil price increases jacked up the cost of packaging, distribution and
refrigeration.

What's driving inflation

Prices for food and energy jumped faster than those of other goods in the past year, according to a Feb. 20 survey of 17 Southern states:

Energy prices, up 21.5 percent

Food prices, up 5.2 percent

Prices of all items, less food and energy, up 2.5 percent

Overall inflation, up 4 percent

Food price changes, February 2007
to 2008

Cereals and baked goods, up 6.6 percent

Dairy products,
up 13.3 percent

Meats, poultry and fish, up 4.8 percent

Orange Juice, up 9.9 percent

Fruits and vegetables,
up 1.3 percent

Fats and oils, up 7.7 percent

Source: Bureau of Labor Statistics

Did you know?

Bigger food price shocks have rippled through the economy in past recessions, but shopper behavior already has changed.

For the first year since 1980, Americans ate fewer meals
at restaurants — 205 in 2007 vs. 207 in 2006 — and more meals at home.

Shoppers are switching to store brands to save money, but store brand prices are rising faster than brand name prices.

For the first time in 20 years, the volume of Florida liquid milk sold declined as record prices caused consumers to buy less.

Motorists are not buying as much gasoline per trip at the filling station, but they fuel up more often.

Why are food prices going through the roof? 03/23/08 [Last modified: Monday, March 24, 2008 5:48pm]

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