Food makers beginning to pass on commodity costs, says Purdue economist

11-Sep-2011 - Last updated on 12-Sep-2011 at 12:30 GMT

Related tags Wheat

Food manufacturers are beginning to pass on rising commodity costs to consumers, meaning higher grocery prices for the rest of this year and into 2012, according to a Purdue University agricultural economist.

Until recently, higher grain commodity prices had been mostly absorbed by major food manufacturers, according to a USDA research scientist speaking with FoodNavigator-USA last month. However, Purdue economist Corinne Alexander said that the situation is beginning to change.

"The question is not whether costs at the grocery store will increase, it's when," she said.

Flooding followed by high temperatures in the Midwest, poor weather in Argentina and Russia, and higher fuel costs have all contributed to an increase in prices of the three key US grain commodities, corn, wheat and soybeans, causing diminishing stocks amid growing demand.

Nevertheless, prices that food processors paid for raw ingredients over the past couple of years have not increased significantly, even as world grain stocks have been shrinking, Alexander said. She said that higher commodity prices do not always lead to higher food prices.

But major food manufacturers have been making moves to catch up with commodity price rises in recent months, with industry giants including Kraft, ConAgra and Sara Lee all discussing increasing prices earlier this year to improve margins against increased commodity costs.

Alexander added that because soybeans and corn are both used for many different ingredients, consumers could expect to see small price increases for many products. And because both are used for livestock feed, she said that beef prices are likely to rise about ten percent.

"There is always some time lag between higher feed costs and higher meat costs," she said.

As for wheat, among other contributing factors, Mississippi flooding meant that about a million acres of durum wheat – used for pasta – was not planted, Alexander said, which could mean higher pasta prices.

According to USDA figures, the Consumer Price Index (CPI) for all food – that eaten at home as well as away from home – is projected to rise 3 to 4 percent during 2011. For 2012, the USDA has forecast the CPI to rise a further 3.5 to 4.5 percent on 2011 levels.