As investors bet> this week that cattle and coffee prices would rise, they raised a salient question: Just how expensive can food get?
Cattle futures have jumped 11% since the beginning of July. Cattle futures for October settled Tuesday at just over 99 cents per pound, a nickel below the record set in 2008.
Coffee took even more of a leap. Coffee futures hit their highest level in nearly 13 years Monday, when contracts for December delivery jumped to $1.88 a pound. Coffee prices in general have climbed 34% so far this year.
The price surges seem to have come an odd time. The broader market is stagnant, and U.S. consumers are scaling back.
The Department of Agriculture predicts the consumer price index for food, which measures the average change in retail price of food over time, will increase 2% to 3% from 2010 to 2011 and that retail food prices in the U.S. will rise faster than overall inflation through 2012. Food expenditures in the U.S. are projected to hit about $1,618.7 billion in 2019, up from $1.139 billion in 2009.
What makes food so special?
Consider that food prices tend to be more volatile than other costs. They are affected by a variety of factors, including fickle weather patterns. The sharp jumps in coffee prices were caused largely by bad weather in Columbia and Central America that harmed harvests.
Growing demand from emerging markets also plays a role. The rise in beef prices was the result of greater demand from Asia and beef supply issues in the U.S., the largest beef producer in the world. Because a significant increase in the nation s cattle herds usually takes more than two years, the U.S. is having trouble creating enough supply to keep up with new demand. The gap is lifting prices.
Commodity costs are going up, and I think this will persist with more and more emerging market demand, says Erin Swanson, an analyst with Morningstar.
The world s population is expected to grow from 6.8 billion to 9.1 billion by 2050, according to United Nations's Food and Agriculture Organization. The resulting increase in food demand should keep putting upward pressure on prices, says Jack Plunkett, the chief executive of Plunkett Research, a market research firm that studies the food industry.
A growing middle class is also expected to create demand for more foods of different varieties. To keep up with demand, the world will have to increase food production by 70%, according to the U.N.
The food industry is racing to adapt, developing agricultural technology designed to increase the food supply efficiently.
Kevin Penner, an analyst at the brokerage firm Commodity Services, says that the race between more people wanting to eat better food and food companies engineering more food will help drive food prices in the future.
Analysts also say weather patterns could have a greater effect on food prices in the future. Many are now wrestling with projections over how climate change might affect the food supply, as well as agriculture and transportation costs.
One of the biggest factors in many forecasts is the price of crude oil, which affect the cost of producing and transporting food, says Christopher Shanahan, an industry analyst for Frost & Sullivan. He says he expects the crude prices to rise in the coming years, driving up food prices.
The U.N. s Food and Agriculture Organization s Food Price Index a measure of the prices of meat, dairy, cereals, sugars, oils and fats around the globe shows that prices have risen fairly steadily during the past decade, from a reading of 95 in 2000 to a reading of 165 in July 2010. Severe droughts, increased demand from emerging markets and an increase in biofuel production triggered a big uptick from 2007 to 2008.
For consumers, these price increases can translate to bigger bills at the grocery store and when dining out.
However, commodity prices and grocery and restaurant prices do not move in lockstep, says Michelle Chang, an analyst with Morningstar. Although consumer prices are likely to rise somewhat, many retailers are reluctant to raise them too much in the current economic climate, she says. Instead, they may choose to leave prices fairly flat and try to keep profits up by lifting sales, but their strategy may change as the economy recovers.
Here s how four food groups could be affected:
1. Meat, especially beef and pork
Many analysts say meat will see the biggest near-term price jump because of the world s growing middle class.
As discretionary income levels in China rose over the past 15 years, their meat consumption doubled, according to a report by the Economist Intelligence Unit, an economic research and forecasting firm.
Ephraim Leibtag, an economist with USDA's Economic Research Service, says consumers should expect prices of beef and pork to rise the most, with chicken prices lagging a bit behind them.
Recent data suggest that trend is already underway. The consumer price index for beef was up 6.7% in July over the year-ago period. Over the same period, pork prices climbed 6% and poultry rose 1%.
The USDA predicts that meat prices will rise more than 3% from 2010 to 2011 and more than 4% from 2011 to 2012.
Grains are unique because they are used for fuel, as well as food. About one-quarter of all grain crops grown in the U.S. are used as biofuel in cars, according to a 2009 study by the Earth Policy Institute, a Washington think-tank. Separately, the hunger of a growing population is lifting the demand for grains, especially wheat.
In the shorter term, prices changes in grain should come primarily from demand for wheat, as weather and trade problems impact production and delivery, Leibtag say. In the longer term, price increases should be driven more by demand corn and soybeans for biofuels, as higher energy costs prompt greater development of alternative energy technologies.
In the coming decade, consumers should see price hikes on loaves of bread at the grocery store, at pizza shops and at the diner. The UDSA predicts the CPI for cereals and bakery products will increase at a rate of about 2% to 3% per year. By 2019, cereals and bakery products will be one of the highest indexing categories of food on the CPI list, according to the USDA.
3. Fish and seafood
Demand for fish and seafood is also on the rise, lifting prices. The USDA predicts that the consumer price index for fish and seafood will increase from a reading of 232 in 2009 to a reading of 342 in 2019 (the baseline index is 100 from 1982-84), the highest reading on the list for that year.
Americans are demanding more fish, a trend expected to continue through 2050, says Rodney Holcomb, an agriculture economist at the Oklahoma State University. Efforts to develop better methods of aquaculture, or the farming of fish, will likely increase to meet this demand, Shanahan says, though they are unlikely to keep prices down. Because a large percentage of fish consumed in the U.S. is imported, crude oil prices also play a role.
4. Fruits and vegetables
The future prices of fruits and vegetables are especially hard to predict because these crops are directly affected by the weather, however most analysts predict their prices will rise. The USDA projects prices for fruits and vegetables for U.S. consumers will rise about 2% per year. The agency also projects a CPI of 340.6 in 2019, the second highest ranking on the list, behind fish and seafood.
U.S. consumers tend to demand fruits and vegetables that are not in season locally and must to be shipped from other countries, driving up prices, Holcomb says. Like other imports, energy prices can affect their costs.