The invisible food crisis: Food prices are going up everywhere. Will they start rising in America, too?

Commentary about business and finance.
Feb. 17 2011 6:28 PM

The Invisible Food Crisis

Food prices are going up everywhere. Will they start rising in America, too?

Groceries. Click image to expand.

The next time you are in your local grocery store, look for signs of dramatic inflation. You won't find any. In all likelihood, your bananas and breakfast cereal and milk are about the same price as they were a year ago. According to the Bureau of Labor Statistics, the price of a basket of common foods increased only about 1.5 percent in 2010, after declining 0.5 percent in 2009.

Perform the same exercise in an Egyptian or Bangladeshi market, and you would get a different picture. In the past few months, skyrocketing food prices have raised concern among economists and anti-hunger advocates—and rising food costs have even helped foment revolutions. This week, the World Bank reported that food prices increased 15 percent from October to January and have climbed 30 percent in the past year. Currently, the bank's price index sits just 3 percent below its 2008 record. The United Nations' Food and Agriculture Organization keeps a separate index of food costs—and it blew past the all-time record last month. Wheat prices have doubled since last summer. The price of corn has risen about 75 percent since June. Prices for sugar and cooking oils have also jumped. The consequences are potentially devastating. The World Bank says that spiraling food costs have driven 44 million people into extreme poverty since June 2010.

What is causing such a drastic spike? And will it ever reach America?

The price spike is explained through a number of dynamics. First, farmers have diverted more resources to growing crops for biofuels, such as ethanol made from corn and biodiesel made from palm oil. Currently, the United States diverts millions of bushels of corn to fuel-production—whereas it diverted virtually no corn to the process 10 years ago. Writing in the Washington Post, Princeton scholar Tim Searchinger says that biofuels now eat up 6.5 percent of the world's grain supply and 8 percent of its vegetable oil. Such competition for crops pushes prices up.

Second, the simple laws of supply and demand are in play as well. In developing nations, more people are buying more food. Moreover, they are purchasing more meat, which requires not just the cow or pig, but the grain to feed it. And as demand for food has increased, there have been supply shocks. A few key producers of food, such as Russia and Australia, have suffered brutal droughts or floods. And because nations now tend to hold smaller stockpiles of grains and other staples—partially due to changing World Trade Organization rules—the food supply chain is now more sensitive to such supply shocks.

Finally, there are less direct market forces. Commodity speculation—traders making bets on the direction of commodity prices—can drive up the price of crops and fuel, a major component of food costs. The Federal Reserve, meanwhile, has printed trillions of new dollars in the last two years—lowering interest rates in the United States and increasing the amount of money available for investment. Those dollars might be seeking returns in emerging markets, driving up inflation there. (Fed Chairman Ben Bernanke said earlier this month that the price spike could be better explained by the faster pace of economic growth in emerging economies—the so-called "two-speed recovery.")

One way or another, it's clear the food price bubble has reached crisis levels. But why hasn't it reached America? For one, Americans and residents of other industrialized nations consume higher proportions of processed foods—Doritos, hot dogs, and the like. A large part of the price of these foods comes from labor, packaging, and marketing, making them less sensitive to changes in food costs. They're less food than food-based products. Economist Mark Perry produced a chart that helps demonstrate the phenomenon. Food prices for raw goods (like wheat) fluctuate wildly, while prices for processed goods (like breakfast cereal) are far less volatile. Additionally, the lagging U.S. recovery has caused a slump in demand for consumer goods. Americans have not been buying much of anything for a few years now—whether restaurant food or cotton t-shirts. That has forced retailers to keep prices low across the board.

All that said, the honeymoon might soon be over. Indeed, some U.S. companies have started warning that they will need to increase prices due to rising commodity costs. For instance, cereal maker Kellogg says it has bumped up prices, and expects the price tag on a box of Wheaties to keep increasing this year. And a BLS report today shows signs of inflation in food and energy costs. In January, the core inflation index—which excludes more volatile food and energy prices—increased only 0.4 percent. But prices for fuel, a major contributor to food prices, spiked, with gas climbing 3.5 percent after a 6.7 percent rise in December. And the cost of food itself rose a sharp 0.5 percent. So don't expect low prices at your grocery store forever.

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