Farm Prices' Roundabout Path to Market

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For instance, it appears that meat producers are absorbing at least some of the increased costs of feed. Pilgrim's Pride (PPC), which processes chickens, blamed its steep second-quarter losses on the increased cost of the grain it feeds to chickens, which has outpaced increases in chicken prices at the grocery store.

Retailers also sometimes delay price increases, particularly on competitive items. "If milk goes up a dime, you don't necessarily charge an extra dime," said Dale Riley, the owner of Fresh Seasons Market in Minnetonka, Minn., which does about $11 million in annual sales. In general, however, "if we get an increase from the manufacturer, we pass that increase along."

In a difficult economy, retailers worry that if they do pass on cost increases, hard-pressed shoppers will switch to easily available substitutes or stop buying some items altogether. Sure enough, retail researcher Information Resources found that some consumers have shifted spending to private-label supermarket brands instead of more expensive brand names and stopped buying certain nonessential items as prices have gone up. Riley has seen these trends at his store, and they're eating into profits. "No one's bragging about sales in the supermarket industry this year," Riley said.

There's little sign of a letup in the coming year. Wheat prices have come down in recent months as more farmers devote land to growing it, but the flooding has drenched millions of acres of cropland in corn and soybean states such as Iowa and Illinois. That will wreck an already bad season for some farmers.

Lean Times for Livestock

In the long run, the most dramatic effect will be on that long back aisle: the meat section. That's because most Midwestern corn is used to feed animals, and as it has become scarcer, its price on the futures market has increased rapidly. Corn, which was holding steady at about $2 a bushel as recently as two years ago, has flirted with $8 since the flooding began. Farmers can lock in grain prices early in the season, but many are already paying prices that have whittled or erased their margins on each animal they sell. When that happens, farmers start taking their breeding animals to market early—known in the industry as "liquidating" their stock—in order to cut back on supply.

That has already begun in the pork industry, and it will likely accelerate, said Mildred Haley, an agricultural economist who specializes in the hog and beef markets for the Agriculture Dept. "We're going to see liquidation," Haley said. "With these corn prices, there simply is no way" they can keep feeding as many animals as they are feeding now.

Once producers start cutting back, it will take about a year for retail pork prices to rise at the supermarket, said Chris Hurt, an agricultural economist at Purdue University. Beef price increases generally take about two years to make their way to stores.

Craig Rowles, a partner in Elite Pork Partnership in Carroll, Iowa, which brings about 140,000 to 150,000 pigs to market a year, said he successfully locked in corn prices early in the season using financial instruments known as hedges. But he is still paying far more than he has in the past. He can get 75¢ per pound for his pigs, but he expects to soon pay as much as 95¢ per pound to feed them. That has compelled him to start bringing pigs to market earlier, to cut back on feeding costs. The reduced supply of pork will start pushing prices up at the grocery store during the next year, he says.

"Meat market prices eventually will have to go up to levels where we can return to profitability," he said. "Those levels will be enormously higher than what is currently out there."

Salzman is an intern at BusinessWeek.