SN Year in Review 2007: Weather, Ethanol Boom Push Prices

AMY SUNG

FEDERAL MANDATES FOR ethanol production resulted in higher corn and animal feed costs this year. When combined with increased petroleum costs and rising global demand for certain commodities, the result was higher wholesale prices for meat, dairy, grains and many produce items in 2007.

Meanwhile, lingering droughts, severe freezes and wildfires curbed yields of other produce items not only in the U.S., but globally as well.

Partly as a result of these factors, the Consumer Price Index for all food was 4.4% higher in October 2007 vs. a year earlier. According to the U.S. Department of Agriculture, prices could continue rising in 2008, depending on fuel and transportation costs, and whether agricultural market prices stabilize.

The increased demand for corn for ethanol, plus higher hay prices, resulted in farmers paying more for animal feed this past year, which in turn contributed to price hikes in many commodities, including beef, eggs and milk.

Ethanol production capacity is up 2 billion gallons from a year ago, to 6.9 billion gallons, according to the USDA.

“Producers responded to higher prices and returns for corn in late 2006, increasing corn-planted acreage by 15.3 million acres to 93.6 million acres, the largest area planted to corn in over 60 years,” said Keith Collins, the USDA's chief economist, in his statement before the House of Representatives Committee on Agriculture.

Yet even with record yields, it seems likely that prices for corn will remain high next year as well.

Cattle prices reached a record high this year as beef production declined 0.7% in 2007, according to the USDA. Similarly, pork prices, as of October 2007, were up 1.4% from a year ago. Although poultry prices stabilized in October, decreasing 0.7% from September, they are still up 6.9% vs. October 2006.

Milk prices reached new heights as well, with high feed costs and short supplies of high-quality forage reducing the growth in milk production per cow this past year. Strong global demand from China also helped increase dairy prices. Prices of cheese, butter, nonfat dry milk and whey were all up sharply in 2007, boosting the all-milk price to a record $19 per hundredweight. As of October 2007, milk prices were up 18.8% compared with a year earlier.

Droughts in the U.S. and abroad, combined with higher diesel and transportation costs, pushed the price of wheat and other grains higher as well, resulting in a 4.7% increase in the average price of cereal and bakery products this year, according to the latest USDA data.

The weather wasn't any kinder to produce growers. California's fruit and vegetable crops were heavily damaged by a freeze at the beginning of the year, which primarily affected citrus crops. A separate late freeze in the Southeast devastated the region's tree fruit crops, as well as other fruits and vegetables, including watermelon, tomatoes, cucumbers, squash, corn, wheat and tobacco. In October, wildfires in California destroyed about 5,000 acres of avocado groves. Although imports helped ease the impact of these events, tightened supplies still led to price increases on many items. Average grower prices through September were up 6%-7% from a year earlier and retail prices were up about 4%, according to the USDA.

Retailers contacted by SN said they were doing their best to hold fresh food prices steady in this climate, although inflationary pressures have already pushed the retail prices of some items higher.

“Across the board, retail increases are relatively small compared to [wholesale] cost increases,” Dwaine Stevens, spokesman for Publix Super Markets, Lakeland, Fla., told SN.

“It takes a lot for us to increase prices. We don't do it for a short-term cost increase. It must be a long-term cost increase for us to increase our retail. Even then, some items may go up while others remain steady.”

For example, chicken, pork loin chops, rib chops and ground meat are up slightly at Publix, but prices for items like boneless strip steak, boneless rib eyes and pork tenderloins have remained the same.

“We had to raise prices where we incurred the highest cost increases,” Stevens explained. “We remain competitive where we incurred the more modest cost increases.”

The rising costs of energy and fuel haven't impacted PCC Natural Markets, Seattle, as much, the company said, since it tries to source locally whenever possible. Some produce prices have increased this year vs. 2006, but the increases were less than the prior year, 2006 vs. 2005, according to Paul Schmidt, director of merchandising.

“A specific example of higher meat costs is turkeys, the wholesale cost of which has increased overall by about 7% this year over last,” said Schmidt. “Our retail prices reflect that increase. However, we don't always raise our retails in response to wholesale increases, and we rarely raise retails absent wholesale increases.”