The Future of Food Prices: What Will Food Cost in 2015?

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The current prices in your grocery store don’t presage an approaching storm. But that’s exactly what’s coming, says Bill Lapp, president of Advanced Economic Solutions, a consulting firm in Omaha, Nebraska, and the former chief economist for ConAgra Foods (CAG).

In the last nine months, he says, the prices of corn and wheat have doubled; the price of corn alone (nearly $7 a bushel) is three times higher than the previous norm. Lapp estimates that the higher prices for these commodities – for the grains we eat and those used to feed livestock – amounts to some $40 billion in costs not yet passed on to the consumer. But the higher price tags are coming “sooner rather than later," says Lapp. He calls it a “big liability in front of us.”

There are several reasons for the accelerated rise in grain prices: demand for foodstuffs from developing countries, like China and Brazil; weather events (such as last year’s severe drought in Russia) that stretched already-tight stocks of grains; a weak US dollar; and the US biofuel policy that taps corn for ethanol.

Although the American public may not be aware of the lag time between the rise in commodity prices and an increase in wholesale food prices, in countries like China, India, and in parts of the Middle East, where food processing is less prevalent than in the US and groceries occupy a greater share of individuals’ budgets, people are already finding that out. In January, the UN World Price Food Index reported a year-over-year increase of 28%. Many believe that increased food prices played a major role in the current unrest in the Middle East.

So what can Americans expect? What will basic groceries cost us one year from now, or four years from now, in 2015? To find out, we asked Lapp to analyze the major categories of groceries, as defined by the benchmark Consumer Price Index (CPI), and measure the share of their costs related to commodities.

(Roughly one-third of the cost of groceries depend on the underlying commodities, and the rest of the cost reflects non-commodity attributes like labor, manufacturing, packaging, and distribution, which have seen modest increases in recent years.)

Taking several complicated factors into account, Lapp’s prediction is that overall consumer prices – as measured by the CPI – will rise an average of 3-4% annually from 2011 to 2015. Over that period, he expects to see a higher rate of increase in the early years – because of the already substantial increase in commodity prices about to find its way into grocery stores. He expects the meat industry – where corn is commonly used as feed for livestock – to experience the most dramatic spike.

Using Lapp’s analysis, Minyanville looked at how much our regular trip to the grocery store might cost in 2015 compared to now. We used current retail prices – averages recorded for US cities by the Bureau of Labor Statistics – to find our baseline costs. (In Canada, we used prices from Statistics Canada citing average prices for February 2011.)

Here’s what we discovered in eight major categories:

A LOAF OF BREAD

You’d have trouble finding a more popular kitchen-cabinet staple than a loaf of bread. As many consumers have noticed, the price for this basic good has already moved up, and not insignificantly, by 7% in 2010. But the cost of wheat has doubled in less than a year, so the price of a standard loaf of whole wheat bread is set to rise even further.

Lapp expects the cost of all cereal and baked goods to increase by 3-5% annually. That means that the average retail price for a loaf of bread should come in around $2.16 in 2015.

DAIRY PRODUCTS

Like the meat industry, the dairy industry is at the mercy of the price of corn for much of its feed costs. So the next few years will be a one-two punch for American consumers of dairy: Higher feed costs will move up the price of milk, cheese, and butter, and rising demand from developing countries may push up the global price for milk, requiring Americans to shell out more at the local store.

Lapp estimates an annual average increase of 3-5% across the dairy category. Currently, a gallon of milk retails for an average price of $3.30. That can be expected to rise to close to $4 in four years. It may not seem like a lot, but a bowl of cereal and milk might become noticeably pricier.

GROUND BEEF

The meat industry has already started to pass its higher costs onto the consumer. In 2010, the price of ground beef went up about 7%, according to the CPI. “We’ve begun to see the dynamics of that market affecting prices now,” says Lapp.

Because of higher feed costs, meat producers have lowered per capita supplies of all proteins, he adds. But export demand from developing countries is strong. Not surprisingly, the USDA forecasts record prices for protein items like beef and poultry; the price of live cattle already stands at record prices.

Ground lean beef currently averages $3.59 per pound, and Lapp expects the largest increase in consumer prices to come from meat and poultry, at 5-8% annually. If he’s right, beef won’t be a bargain in 2015, when the same pound may cost close to $5. It could be enough to turn many Americans into vegetarians.

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