Higher Transportation Costs and Rising Commodity Prices Blamed for 40% Increase in Food Prices

5 Groceries Going Up In Price This Summer

As food prices continue to rise, while our salaries do not, more and more American's will feel the pinch. Next year the United States and the world need to have a bumper crop, or we could see food costs spiraling out of control and many families struggling to keep the cupboards well stocked.

July 13, 2011

Investopedia - Across the globe food prices have been rising sharply, by 37% in the past year, according to a recent Bloomberg report, and grocery prices in our stores are following suit. Higher transportation costs and rising commodity prices are being blamed for the increases in food prices that we are witnessing in our stores.

As food prices continue to rise, while our salaries do not, more and more American's will feel the pinch. We look at which items in our grocery baskets are going up in price, and wonder what is causing this dramatic spike in food costs.

1. Wheat

Wheat production is expected to be lower this year than it has been in the last two years, according to government estimates. The biggest wheat producers -- China, India and Russia -- suffered severe weather last year which damaged their crop. Russia was also devastated with fires, destroying wheat exports and prompting the country to ban exports.

The simple law of supply and demand has come into play, and at present the demand for wheat outstrips production, so the price continues to be pushed upwards.

Even Kelloggs, the cereal giant, is passing the rising raw material price onto the consumer, by bumping up its prices and says that it expects the cost of a box of cereal to continue to climb.

2. Corn

The price of corn touched a record high of almost $8 a bushel earlier this month, amid some of the tightest supply, demand conditions ever seen.

Corn has also been affected by the severe weather that has hit the wheat crops, whilst European farmers are contending with the driest growing conditions in three decades.

But it is not just weather conditions that are affecting the cost of corn; U. S. economic policies are also playing their part. About a sixth of global production of corn is now converted to ethanol -- a biofuel. The United States spends about $6 billion a year on federal support for ethanol production. Thanks to this financial assistance, one-sixth of the world's corn supply is burned in American cars. That is enough corn to feed 350 million people for an entire year.

3. Meat

Livestock is fed on a diet of corn, so the high price of corn is driving up the cost of feeding the animals, which is in turn driving up the cost of meat.

Also, cattle herd sizes in the United States are at their lowest levels in 53 years, as high feed costs led beef producers to slaughter many of their animals to take advantage of the higher prices for their produce. This creates the problem of supply and demand, especially as many farmers are seeing raising feed-costs as a big concern for the future. As long as the price for corn keeps growing, livestock farmers will be discouraged from expanding their herds.

4. Dairy

Of course, if the cost of rearing animals has risen, then by default the cost of dairy products has risen too. Wholesale cheddar cheese prices are up about 25% from the end of 2010, an increase comparable with the 23% rise in the price of crude oil. Butter has gone up even more, rising about 45% in the wholesale markets since last fall.

But there is another factor in the rising cost of our dairy goods: a 48% increase in exports in the first quarter of this year compared with the same period last year.

5. Coffee

Coffee price increases show no signs of easing in the near future due to issues on both the supply and demand sides of the equation. The price of the beans is now at a 13-year high. Colombia has had a few years of weak coffee harvests because of too much rain, which has seriously reduced the global supply.

Earlier this year even Starbucks, who had previously said they would not pass the coffee bean price-rise onto customers, have had to increase their prices. But coffee drinkers keep buying coffee, even as prices rise -- so it seems the demand is inelastic!

The Future of Food

Cutting back has become a necessity for many American families during this recession, but worryingly it seems that many American homes are struggling to cope with the rising food costs, According to Feeding America's 2010 hunger study, more than 37 million Americans are now being served by food pantries and soup kitchens.

Next year the United States and the world need to have a bumper crop, or we could see food costs spiraling out of control and many families struggling to keep the cupboards well stocked.