Commodity Prices Force Food Price Increases

General Mills Inc. says it will do it. Nestle may too. Kraft is rumored to be considering it. Even McDonald's may do it.

With the recession officially over and agricultural inputs from the rest of the world suffering, the prices of grain and other agricultural commodities are rising. And it looks like it won't be long before U.S. and Canadian food & beverage companies mark-up the prices of many products.

With food & beverage companies having spent the past two years squeezing out every unnecessary operational dollar, there appears to be no alternatives left to hold prices in the face of increasing costs.

The Wall Street Journal in October reported General Mills indicated the prices of some cereals will increase by a "low single-digit" percentage rate about Nov. 15. The paper cited unnamed sources predicting the same for Kraft. MarketWatch quoted Nestle officials tipping a 1.5 percent increase to offset 2-3 percent higher input costs.

The Journal also quoted Domino's Pizza Inc.'s CFO as blaming food inflation, primarily cheese and meat prices, for hurting company-owned store margins during the third quarter. The CFO said cheese prices, for example, were up almost 29 percent over a year ago.

U.S. crops are coming in bountifully. Corn production was forecast in October to come in at 12.7 billion bushels, down 3 percent from last year's record level. Soybeans were forecast for a record high 3.41 billion bushels, 1 percent above last year. Oranges should total 9.06 million tons, up 10 percent from the 2009-2010, with all types up over last year's numbers.

But harvest problems in other parts of the world are pressuring U.S. crop prices. Russia was hit by its worst drought in 100 or more years. The government reacted by banning all wheat exports, while imports of all crops were on the rise. China's increasing appetite for imported crops, particularly soybeans, also is affecting world agricultural prices.

Despite the great domestic harvests, the price of corn is up 44 percent in the past year. Milk is up 6.5 percent. Sugar, which has been running counter to other prices, is now in lock step. Sugar hit an all-time high of 24.9 cents a pound in December 2009, then retreated to 15 cents in May, but shot up to 22.68 cents in September.

All of which is not to mention prices in fuel, steel and other factors relating to food processing and distribution.

“Global economic recovery with steady growth provides an improved foundation for demand for crops over the next several years and through … 2019," according to a report, “Agricultural Baseline Projections: U.S. Crops, 2010-2019," released earlier this year by USDA's Economic Research Service. “Although growth in corn-based ethanol production in the United States is projected to slow, the large expansion in recent years keeps this use of corn high. In combination, these factors support longer run increases in global consumption and trade, with prices for many crops remaining at historically high levels."

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