Spikes in commodity costs can take six months to work their way from the farm to store shelves, according to a report in the Chicago Tribune. That means food inflation should retreat in 2009, but not necessarily back to the levels consumers were used to seeing, agricultural economists said.
Meanwhile, long-term trends that have been pushing food prices higher-growing [image-nocss] global demand and an increasing flow of grains to fuel production-may hibernate a bit as the world's economy slows, according to the newspaper report. But don't expect them to go away, economists said.
"If you believe in business cycles, and that the economy will come back, we'll have these problems again," Ephraim Leibtag, an economist with the U.S. Department of Agriculture, told the newspaper.
Leibtag estimates that next year, the consumer price index's food inflation rate will fall to about 4%. That's an improvement over the 5% to 6% year-over-year rate expected for all of 2008, but above the long-term annual norm of 2-3%.
Food prices began to climb faster in the second half of 2007, accelerating in 2008 as agricultural commodities and oil prices rocketed. But most commodity markets peaked by early summer and then plunged in the fall as the economy imploded.
"Commodity prices are down from all-time highs, but are still higher than they were two years ago," Leibtag said. And those higher commodity prices are still "working their way through the chain," he said.
Bill Lapp, principal economist at Advanced Economic Solutions, points to trends in the producer price index, which measures changes at the wholesale level.
In recent months, increases in the food component of producer prices still have been greater than jumps in consumer prices. "This suggests wholesale prices haven't been fully passed through," he told the Tribune.
Of course, packaged-food firms aren't necessarily in a hurry to pass through any declines in their input costs, the newspaper writes.
As their costs rise initially, foodmakers often are slow to raise prices for fear of losing market share to competitors, economists said. Consumers benefit as retail price hikes lag rising costs faced by producers.
Now, the lag effect works the other way. Even as commodity costs fall, food producers don't necessarily have to cut prices-and therefore reduce their profit margins, Leibtag said. "If your competitors are not cutting their prices, there's no incentive for you to, either."
But as economic duress lingers or deepens, food manufacturers and retailers will have more incentive to cut prices to stimulate demand, particularly on higher-priced foods, Leibtag said.
The global economy's plunge seems to have temporarily mitigated the ethanol factor on food-price inflation. Though disputed by the ethanol industry, some economists say the growing demand for grain to make ethanol helped spark the commodity run-up, particularly for corn prices.
As economic output has waned, demand for oil has declined, sending crude and gas prices tumbling. That reduces demand for ethanol, some economists say. See related ethanol story in this issue of CSP Daily News.
"Corn depends on ethanol, and ethanol depends on oil," said Michael Swanson, an agricultural economist at Wells Fargo. Lower gas prices reduce ethanol production incentives, which in turn decreases corn demand, easing pressure on corn prices in the process, Swanson said.
But when gas prices start soaring again-and experts say they likely will when the economy recovers-ethanol demand will spike, he said.
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