ShareThisThe U.S. Department of Agriculture has forecast that food prices will only rise 0.5 percent to 1.5 percent this year, less than the 1.8 percent increases in 2008 and 2009 and the lowest rate of food inflation since 1992.
Enjoy it while you can, commodities followers say.
They predict a variety of short-term factors -- ranging from the current drought affecting Russia's massive wheat crop and floods in Pakistan -- as well as growing global aspirations for the high-calorie diet American consumers take for granted will translate into higher prices for meat, wheat, corn and other food items in the years ahead.
Their forecast is based on a simple economic assumption: Demand will outstrip supply.
While food prices have backed off from earlier highs, they remain well above historic levels, Jefferies and Co. analyst Stephen Volkman said. Prices are elevated even though farms around the world are operating at near capacity "even at the bottom of the global recession," he said.
The USDA is forecasting U.S. farmers will produce 2 percent more corn and soybeans this year than they did in 2009, when they set production records for both crops.
"We expect a sharp recovery in agricultural commodity prices as the global economy recovers," Volkman wrote clients last week. "With limited global capacity available, any demand increase appears likely to shift crop prices markedly higher."
It's not unusual for weather to have a sudden impact on food prices, whether it's too little rain in the U.S. grain belt or an unexpected freeze that stunts Brazil's citrus crop. And concerns about Mad Cow disease and other problems can send meat and poultry prices higher.
Daniel Basse, president of AgResource, a Chicago commodities research firm, said the price impact of the drought in Russia and Eastern Europe and the Pakastani floods will carry over into next year. If there are more weather-related problems, the percentage of disposable income U.S. consumers spend on food could go from 10 percent to as much as 13 percent in the next few years, he said.
"We're only beginning to understand this is a global food market and whenever you have problems like a drought in Russia, it does affect our dinner plate," Basse said.
The impact of weather-related events, while painful, is short term.
What will be more significant over the long haul, commodities experts predict, are the appetites of growing middle classes in China and other developing nations.
"Everybody wants to eat like an American, which is 3,400 calories a day. For most of the world, they're not halfway there," Basse said.
The USDA estimates that 40 cents of every $1 of income growth for the Chinese consumer will be used for food, said T. Marc Schober of Colvin and Co., an Anoka, Minn., alternative investment fund manager.
"That's a typical trend in countries with low gross domestic products," he said.
Schober said China increasingly will rely on imports to satisfy the expanding dietary needs of its consumers. Although China accounts for 20 percent of the world's population, it only has 7 percent of the farmable land on the globe, he said.
When it comes to determining corn prices, one of the biggest influences has nothing to do with how much humans -- or the animals human eat -- consume. Corn also is used to make ethanol, which can be blended with gasoline to reduce the economy's reliance on imported oil.
Volkman said that when gasoline prices began recovering in mid-2009, it became more profitable for gasoline companies to buy more ethanol. He expects continued high prices and U.S. Environmental Protection Agency regulations mandating increased use of ethanol will spur increased demand for non-food uses for corn.
Every ear that goes into a gas tank is one less ear that can fatten cattle or other livestock. Higher feed prices have prompted many ranchers to take their cattle to market sooner rather than keep them on a high-priced diet, Mindlin said.
"The cows they're bringing in to slaughter weigh less. You get less meat," he said.
Basse said high feed prices have reduced the size of the U.S. beef cow herd to its lowest level since 1952, which he thinks will put upward pressure on beef prices for the next two or three years.
To be sure, commodity prices are only one component of the price tags found at your local supermarket. Packaging, transportation, marketing, employment and other costs are also reflected in what consumers pay.
But commodities are a good barometer of the global economy, said BNY Mellon chief economist Richard B. Hoey. There's no lag in reporting prices for wheat, sugar and other commodities like there is for other economic statistics, which are only issued weekly, monthly or quarterly, he said.
(E-mail reporter Len Boselovic at lboselovic(at)post-gazette.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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