Impact of corn prices on food? Not what you think
NEW YORK (AP) — Cornflakes won't necessarily be more expensive as a result of rising corn prices, but the milk you pour over them might be.
A drought covering two-thirds of the country has damaged much of the country's corn crops and pushed grain prices to record levels, triggering fears that a spike in food prices will soon follow.
But there are many factors that determine the price of goods on supermarket shelves. A diminished corn supply doesn't mean that all food prices will be affected the same way.
In fact, you're more likely to see higher prices for milk and meat than corn on the cob. That's because the sweet corn that shoppers buy at a grocery store is grown differently and not as vulnerable to drought conditions. As for the corn that's used as grain feed for cows, however, farmers are paying more as the drought persists.
"The financial stress is starting to mount because the bills (to feed the cows) are bigger than they were six months ago," says Chris Galen, a spokesman for the National Milk Producers Federation. "What will consumers will see as a result? That's where it gets a little murkier."
One major factor that complicates the equation is the amount that supermarkets decide to mark up the foods they sell to shoppers. Since supermarkets are facing stiffer competition from big-box retailers and drug stores, they're being much more judicious about how much of their rising costs they pass on to customers.
Nevertheless, the Agriculture Department said last week that it expects grocery prices to rise between 3 percent and 4 percent next year, which is slightly higher than normal.
Here's a look at how different foods will be impacted:
MEAT & DAIRY
In addition to paying more to feed their cows, farmers are dealing with grazing pastures that have been baked dry. The combination is resulting in farmers selling off the animals they can't afford to feed in recent weeks, particularly since cattle supplies are already limited and beef prices have been climbing steadily in recent years.
Beef from those animals streaming into auction yards is expected to start showing up in grocery stores in November and December, temporarily driving down meat prices.
"The irony is that we could start seeing some price reductions in the short run," says Bruce Jones, a professor of agricultural economics at the University of Wisconsin.
By early next year, however, prices are expected to spike as a result of the smaller livestock herds and dwindling meat supplies. Already, the number of cattle in the U.S. has been dropping for years and the USDA said this month that the nation's cattle inventory was the smallest since the agency began an annual count in 1973.
Next year, the USDA says beef prices are expected to jump 4 percent to 5 percent, making it among the biggest price hikes for food. Dairy product prices are expected to climb 3.5 percent to 4.5 percent, poultry and egg prices up by 3 percent to 4 percent, and pork prices up by 2.5 percent to 3.5 percent.
FRUITS & VEGETABLES
So why isn't anyone talking about a shortage of fruits and vegetables in light of the drought? Unlike the corn that's grown to make animal feed and oil, produce sold in supermarkets is typically irrigated by farms and not as affected when there's a lack of rain.
In addition, supermarkets import many of their fruits and vegetables from other countries — such as, bell peppers from Holland —so that they can keep supplies and prices in check even if one source isn't producing a large amount.
Fruits and vegetables are also a loss leader for supermarkets. That means they're often sold at a loss in hopes of attracting shoppers who will spend on other items, says Lisa Schacht, president of the Ohio Produce Growers and Marketers Association.
At farmers markets where consumers buy directly from growers, a spike in prices might be more pronounced. That's because the relentless heat is making it harder to grow certain fruits and vegetables.
"Even if you irrigate your peppers, you're seeing a 30 percent reduction from the heat," says Bryn Bird, whose family owns Bird's Haven Farms, a farm outside of Granville, Ohio. "They just don't want to grow."
The result is that Bird's Haven is selling tomatoes at $3.25 per pound, compared with the $1.99 per pound that's more typical this time of year. The types of available produce might differ too. At Bird's Haven, the okra and eggplant are growing fine in the heat, but the family has given up on cucumbers.
"They're coming up, but they're just not fruiting," Bird says. "There a lot of vines with nothing on them."
As for the ears of corn sold at supermarkets, there shouldn't be a huge spike in prices. The sweet corn that people eat is typically irrigated like other fruits and vegetables. And although the drought is pressuring farmers, it's not to the same severity as the corn fields that produce animal feed.
Overall, the USDA projects an overall 2 percent to 3 percent price increase for fruits and vegetables next year. That's in line with this year's increase.
Another worry is that the price of many packaged foods that contain corn or corn ingredients will climb. High-fructose corn syrup, for example, is used in a wide variety of foods such as cookies, yogurt, cereals and spaghetti sauces. A can of regular soda contains 40 grams of the sweetener.
The corn ingredients that are used in packaged foods mostly aren't irrigated either, meaning they're also vulnerable to the vagaries of weather and the price fluctuations.
But keep in mind that such ingredients are often a tiny fraction of the costs that go into packaged foods. Among the many expenses food makers such as Kellogg Co. and Kraft Foods Inc. also have to foot: packaging material, labor, advertising and fuel for trucks to get their products in stores.
Based even on today's high corn prices, a 12-ounce box of cornflakes would have only about 8 cents worth of corn, says Paul Bertels, vice president of production and utilization at the National Corn Growers Association. That's a very small portion of the $4 or so that consumers might pay for that box of cereal.
"When you look at final food products, the more processing there is, the less significant the price of the raw materials," Bertels says. "A lot of it is advertising and marketing."
Food makers also have other ways of managing their costs, such as cutting back on how much they put in a package. Even before the drought, PepsiCo Inc. says earlier this year that it put fewer chips in its Frito-Lay bags as a way to offset higher ingredient costs.
And for consumers watching their budgets, a few less chips per bag might be preferable to paying more anyway.
Follow Candice Choi at www.twitter.comm/candicechoi