Food For Thought

Higher food prices are here to stay according to NYT:

• For more than a year, food manufacturers have been shaving package sizes and raising prices, declaring that they had little choice because of unprecedented increases in the cost of raw ingredients like corn, soybeans and wheat.
• Now, with the price of grains and other commodities plunging, it may seem logical that grocery prices will follow. But while prices for some items like milk and fresh produce are dropping, those of most packaged items and meat are holding firm or even increasing. Experts warn that consumers should not expect lower prices anytime soon on most items at the grocery store or in restaurants.Government and industry economists project that the overall cost of food will continue to climb in 2009, led by increases for meat and poultry. A big reason, they say, is that food companies stillhave not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this yearhe Agriculture Department is forecasting that food prices will increase 3.5 to 4.5 percent in 2009, compared with an estimated 5 to 6 percent increase by the end of this year.

As the article claims, producers were behind the curve in absorbing the changes in cost structures of raw materials. Also they have passed on costs to consumers in less that honest ways by reducing the amount of product without changing the price. (although this is probably a healthy option) see Panzner on financial armageddon. As such, costs have yet to be passed on to the consumer.

This begs the question: Under a scenario or rising food prices, will inflation subside as quickly as anticipated? This is particularly interesting in emerging markets where food accounts for approximately 40% of their consumption basket. Worst case scenario, very slow growth and stubborn inflation? Not sure, a hard landing could well be deflationary particulaly in countries like China with excess capacity. This would likely drive the general price basket down.