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Food Inflation

Traditionally, the food industry has absorbed the cost of higher commodity prices, because of the competitiveness of their business, but times may be changing.
Food Inflation

Buying food

Show Dates

Show 0807: Food Inflation

Air date: February 17, 2008



Rob:  A new study says food inflation is at a 25 year high.  According to the consumer price index, food inflation hit 5 point 4 percent last year, a level not seen since 1980.  Traditionally, the food industry has absorbed the cost of higher commodity prices, because of the competiveness of their business.  But times, they may be a changing.  As our Jessica Betts explains, growing global food demand, and higher energy prices are putting the pinch, on consumers, retailers, and even farmers.

Jessica:  Gino Rosani has owned New York Pizza in Norman for thirteen years.  But lately, he's running his restaurant, a little differently.

Gino Rosani:  Flour has gone up 100 percent from 9 dollars to 16 dollars, cheese, that's what we use mostly, cheese, flour, you know, butter...

Jessica:  After raising his prices to 25 cents more a slice, stopping his delivery service, and cutting employees, Rosani and his customers are tasting the results of food inflation.

Rosani:  You used to get 2 slices of pizza and a drink for 5.25 and now they have to pay 7 dollars, you know?  I'm not making the profit I used to.

Jessica:  Evidence of a rising flood inflation that's due to growing world economies, increased food demand, and the production of corn-based ethanol.  Larry Sanders, Ag economist for Oklahoma State University.

Larry Sanders:  It's a fairly complex picture on the one hand, and it's fairly simple on the other.  We have seen energy prices double and triple in the last few years, and it really came home to roost in food production and food distribution and processing during 2007.

Jessica:  According to the U S Department of Agriculture, the price index for food rose 4 percent last year, the highest annual leap in 17 years.  But Sanders says, there's something consumers may not know.

Sanders:  When consumers see food costs going up in the grocery store, it doesn't mean that farmers are getting richer.  That money goes back through the marketing chain and pays the bills of the people who do the work to get that food to the grocery store or to the restaurant.

Jessica:  In fact, the average farmer only sees 20% or less of every dollar paid at the grocery store.  Mike Spradling, president of the Oklahoma Farm Bureau.

Mike Spradling:  It's not a unique situation for the consumers.  All of our inputs, our labor's gone up, our energy costs have gone up tremendously, even electricity on the farm's going to increase considerably.  Our electrical industries, this year are going to find out that their wholesale price increase of electric is 24 percent in the state of Oklahoma.  Farmers, right now, they're paying almost twice in fuel prices what they were just a few years ago.  And the products that they're selling have not doubled.  And so, we're also looking at fertilizer prices right now.  Just two years ago I was paying less than 300 dollars a ton.  This year we'll be fertilizing at 500 dollars a ton, for nitrogen.

Jessica:  An increase fueled by our growing alternative fuel industry.  Spradling says, the growth of corn production for ethanol is now competing with food crops.

Spradling:  So if all the fertilizer is going to the north for corn production, then that means that's one reason that I as a pecan grower am paying 500 dollars a ton for fertilizer, because again, I'm competing for the same product that they are.  It's put a lot of pressure on the cattlemen as well, because their feed costs have gone up as well.  So the inputs, that corn is a major component of livestock feeds, and as its prices goes up so does the price of cattle feed and livestock feed.

Jessica:  And for consumers at New York Pizza, a financial toss-up that could be here, for a while.

Rob:  Joining me now is our Jessica Betts.  So, when was the last time we've seen this large a jump in food prices?

Jessica:  Well, the U S experienced a similar period of rising commodity prices and food inflation back in the 1970s.  Commodity prices doubled, and the inflation lasted from about 1972 to 1981.

Rob:  So, any feel on how long this current trend could continue?

Jessica:  Well during the next five years, food inflation is expected to increase by an average of 7.5 percent which is well above the 2.3 percent average of the past ten years.

Rob:  Talk to me about some specific food items, and which ones have you seen the largest jumps in?

Jessica:  Well, let's take for instance, a loaf of bread.  You can find a loaf of bread in your super store for probably about $2.69.  Well, the farmer who produced the wheat to go into that loaf of bread, only sees 17 cents of that profit.

Rob:  And that 17 cents wasn't much, especially when farmers are getting, you know, $2 for their corn, $3 for wheat, and $5 for beans.  But are those prices now, possibly, a thing of the past?

Jessica:  Pretty much.  The Chicago Board of Trade estimates that all of those products will about double within the next four years.

Rob:  Now, I think an important point that you made in your story is, that while farmers may be getting paid more for their crops, they are also having to spend more to produce them.

Jessica:  Exactly.  They're having to find creative ways to allow their money to stretch in order to meet the high demands of labor and energy costs.

Rob:  All right, Jessica, we certainly appreciate the story.

Jessica:  Thank you.