Inflation puts bite on a new item: Food

A government inflation report issued Friday confirmed what most grocery store shoppers already suspected: Putting food on the table is taking a bigger bite out of their wallets.

Food inflation has more than doubled during the past 12 months, with the cost of some staples of the American diet soaring even faster. Jack Romine noticed it last week, when he paid $2.29 for a dozen eggs at the Brookdale Cub Foods. Nationally, eggs cost 37 percent more than a year ago.

"We couldn't believe it," he said.

A 5.3 percent annual increase in the cost of food may not sound like a lot, but it could prove a big drain on family budgets and the nation's economy.

Workers could demand higher wages to keep up with the cost of living. Or they could be forced to reduce purchases of everything from clothes to cars. Already, most major retailers are reporting weak holiday spending.

Anyone hoping for a retreat from the current price spikes may be disappointed. A growing chorus of experts says the higher prices herald a new world economy shaped by rising worldwide demand for basic commodities such as corn, wheat and oil.

"This is long-term," said Ben Senauer, professor of applied economics at the University of Minnesota. "There's good reason to believe the days of low-cost food and energy are over."

Ethanol use growth

Twin forces have been driving the worldwide commodity boom: the rise of a global middle class and biofuels.

In the United States alone, the use of corn for ethanol grew two and a half times since 2000. High demand this year lured American farmers into growing a record corn crop of 13.2 billion bushels, a whopping 25 percent increase over last year's harvest.

And yet it still hasn't been enough to meet demand, pushing prices up. Corn neared $4.40 a bushel in trading on the Chicago Board of Trade this week, more than double historical averages of $1.50 to $2 a bushel.

All of that expensive corn makes it a lot more costly to produce eggs, said Steve Olson, a spokesman for the Broiler and Egg Association of Minnesota. Chicken feed -- made mostly of corn -- is 60 to 70 percent of an egg farmer's costs.

Dairy farmers pay more for feed, too, up by as much as 40 percent since last year, said Bob Lefebvre, executive director of the Minnesota Milk Producers Association.

Meanwhile, General Mills, Sara Lee and other food companies that rely on corn for many of their products have responded by raising prices on the goods they ship to grocery stores.

Ethanol has also taken acreage away from wheat and soybeans, helping to raise the prices of those now less plentiful grains, said Rick Kment, a dairy and biofuel analyst at DTN in Omaha.

Those pressures could increase in coming years if Congress passes new farm and energy bills that require even bigger increases in the use of ethanol and other biofuels.

The acting USDA secretary has cautioned against blaming ethanol for the rise in food prices, saying more complex factors are at work.

South Asian affluence

The most significant may be the rising affluence of emerging nations like India and China. A typical Chinese consumer drank 5 kilograms of milk in 1990 and 18 kilograms last year, according to the International Food Policy Research Institute. It predicts milk and vegetable consumption will grow 70 percent between 2000 and 2025 for all of South Asia. Consumption of meat, eggs and fish, meanwhile, will grow by 100 percent during the same period.

That's good news for food companies like Cargill and Hormel and for Minnesota farmers, who have seen global exports grow.

"We have demand that's outstripping supply," said Lefebvre.

Supplies may not match demand for a decade, according to the International Food Policy Research Institute. Forty years ago, Americans spent a quarter of their income to feed themselves. Today, thanks in part to government subsidies that made staples like corn cheap and plentiful, an average U.S. family spends 7.2 percent of its household budget on food eaten at home. For low-income families, which spend about 20 percent of their household budget on food, the sting of rising food prices is especially sharp.

An inevitability

With more people worldwide competing to buy those products, and the possibility that climate change could further stress world crops, price increases may be inevitable.

Wells Fargo senior economist Scott Anderson sees a spiral of inflation from a sustained march of higher food and energy costs.

"People used to see this as a shock, thinking things will return to normal," he said. "Now it's becoming part of their inflation expectation. Then they'll go push employers for higher wage increases. This can just snowball."

mckinney@startribune.com • 612-673-7329 hcummins@startribune.com • 612-673-4671