Gas And Ingredients Are Cheap, So Why Are Grocery Prices Rising?
With the the cost of ingredients, gas prices, and interest rates dropping, why are food manufacturers continuing to hike prices and shrink products? According to the L.A. Times, supermarkets don't know, but they're as pissed as we are.
We noted in July that food prices were expected to rise. The justifications offered by the companies at the time were that the price increases were necessary due to the rises in the cost of production and commodity prices.
When we wrote that post, gas was about $4 per gallon. The price has fallen dramatically since September, to around $2 per gallon, about what it was in 2005. So fuel costs are no longer a justification.
The Times article cites a few examples of products whose main ingredients have also decreased in price, yet the products themselves have gotten more expensive (and gotten smaller). Kraft macaroni and cheese, for instance, went up by 9% this year, even though cheese and wheat prices have dropped by 38-68%. There's a chart that lists the drops in commodity prices over the last year; pretty much everything but chicken wings and pineapples have decreased in price.
Manufacturers blame the price increases on futures contracts they unwisely bought, and now they're paying too much for cheapened ingredients. Bad speculation strikes again!
Grocers, name-brand food producers at odds over prices [L.A. Times]
(Photo: billadler)
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Comments:
I think its also a way that big firms can protect themselves from inflation without blatantly saying thats what they are doing. Someone should call them out! Large firms who preemptively raise prices on expected inflation contribute considerably to the pressures that actually causes inflation.
Why do we continue to support the corporate economy which is based on gambling? Maybe lawmakers have been wise to attempt the outlaw of gambling in all forms.
Is that sign in the photo for real? What exactly are the ingredients in milk? Let's see, there's... milk, and um... hmm.
You didn't see this coming?
Ah, speculation, is there anything you can't screw up?
Seriously though, I wonder if this is just going to hurt brand names further as I doubt store brands are seeing quite the same situation and were the better value to begin with. Why buy Kraft mac and cheese when the store brand is half the price, especially if you already hurting in this economy or are worried you may be in the future?
@Persistence: Well, I mean, that sort of gambling is kind of how capitalism and the stock market and entrepreneurship works. You take a gamble investing in a company, starting a business, buying wheat futures, etc. etc.
@redskull:
The ingredients in milk?
Depreciation on a cow
Housing and real estate costs for a cow
Licensing costs
Refining costs
Certification and testing costs
Transportation costs
Utility costs for stocking
Marketing and branding costs
Forward contract costs
Applicable financing costs for equipment/cashflow management
Oh, yeah, and I guess grain.
The point being is that your grocery store isn't stocked by Ma and Pa's farm, Dorothy.
@redskull: And all the things you must feed the cows to get said milk. Like corn, which thanks to the ethanol debacle, shot up like crazy. Which reminds me, I have to watch "King of Corn".
Thank god I bought that 1/2 beef at the county fair before they jacked with the prices. Me and the family will have GOOD eatin's for awhile before we need to get anything other than the bare essentials.
I think they are also using this as an excuse to increase their profit margin. WO HO bad times heres our chance they wont blame US.
@redskull: You're terribly amusing, Mr. Shmidt. But I believe that they are referring to dairy products.
We've become accustomed to the price hike so they have no reason to lower prices. Higher food costs aren't getting the media coverage high gas did, so there's no public outcry and no incentive to return prices to normal.
[sarcasm]Maybe the cost of what they feed the cows has gone up?[/sarcasm]
Seriously...how much harder do they have to make it on people. I'm starting to think they want us all bankrupt, i guess we should all go on government cheese...but then again we would still get shafted.
From what I've heard, the cost of animal feed has gone up. But I have not confirmed that.
@cabjf: When done right speculation can be a good thing. Southwest Airlines secured very cheap gas early on and it is paying off for them.
@ADismalScience: 1)You forgot benefits, cost of depreciation on housing for the cow, and miscellaneous expenses that always seem to pop up.
2) Depreciation on a cow? Does that include the cost of A-1?
I've wondered this myself. Most of the prices going up were blamed on "increased cost of transportation". Now transportation is cheap, and food prices keep going up, or packaging shrinking. My guess is people are buying less (except necessities), so they are jacking up the rates to try and make up the difference.
My Electric utility is doing the exact same thing.
Last year when commodity prices where going through the roof. "The cost of coal is causing us to lose $20 million a year. We need to raise rates to cover our losses."
The price of coal (like all other commodities) has since returned to "normal". But our rates have stayed at the new adjusted levels.
@Persistence: "Gambling" could also be called "risk-taking". Do you really want to outlaw the ability for companies to take risks? Because, frankly, we'd all probably starve within the year, because EVERYTHING is risky in some fashion.
Oh, let's just outlaw high risk activities, right? Well, how do you measure risk? Answer: no one's got a really fool-proof way of doing it, so you can't, not in any across the board form you'd need for legislation.
It's pretty clear you've not thought this great plan of yours through.
I also left out taxes, on both dairy products and Hope.
And cows are essentially assets, and have a useful milk-producing lifespan that waxes and wanes. I wonder how they're accounted for - MOOCRS?
kick em when they are down
or
lie, cheat and steal.
take your pick they are both the "American Way"
A: because they can. The same reason text messaging costs .20/message. There is .00/message cost yet you pay .20/message because you pay it. The price will go down when people stop paying. Yes, it is that simple.
@Persistence: Futures markets are more than just gambling. One effect is that they smooth out the pricing bumps that companies pay for goods and materials. But more importantly, it lets them have a fixed price for some period of time in which they can do the planning.
It's not much different than having a contract with a specific supplier, other than they aren't locked in to that one supplier's ability to deliver. They can still buy from the supplier with the lowest price. But they did lose money on their bet in the future's market for things that go down in price.
When the prices go up more than they expected, their futures contract is a benefit to them. The question is whether they will pass that on to consumers then, like they are passing the losses on today.
@Raekwon:
Actually, it's kicking their asses. Southwest has long been the most aggressive of fuel hedgers and they're "paying" much more for fuel than it costs right now. Their results have been god-awful since oil collapsed.
I personally think it's ethanol. If I'm a farmer growing corn why wouldn't I sell it to be turned into ethanol rather then raise it to be quality food for humans or cows.
I haven't purchased a drop of fuel with ethanol in it for a while. Here in Oklahoma many residents have refused also and so many stations are being forced to go back to 100% gas, not the 90/10 stuff.
Not only is this stuff rasing food prices but it's also bad for our cars. Worse MPG and will wear down your engine faster.
Stop buying ethanol and you will see food prices finally come down.
Understand prices will be much higher in the future. Reason: massive government debt will drive up interest rates to sell our bonds, creating hyperinflation. You can't flood the world with dollars and expect any other outcome. With that, you can thank everyone in congress that has approved of this bailout (i.e, save the losers) mentality. It has never worked.
Sticky prices?
Futures contracts were actually formally invented by Samurai in Japan to hedge rice prices. They've existed as long as the harvest, though. The concept is that you lock in a value on a planted crops to plan your expenses and stabilize commodity-for-coin relationships.
Volatility in the commodities marketplace does wacky things to pricing. Ultimately, though, the relative price stability at the grocery store is provided by the liquidity and speculation surrounding it. Were futures and forwards not employed, prices would change both rapidly and drastically.
The minute they raised the prices, it became a line-item on their 2009 budget and revenue plan. To lower the price would require that they don't meet their financial goals.
@LoisAbadon: You've got the cause and effect backwards. Inflation is cause by the increase in the supply of money and credit, and that, in turn will cause prices to increase.
Manufacturers blame the price increases on futures contracts they unwisely bought, and now they're paying too much for cheapened ingredients. Bad speculation strikes again!
Sounds like it's the perfect time for a new company to start eating these stupid companies alive. A new one that doesn't have futures contracts.
It seems like practically everything at my grocery store has been at ridiculous sale prices, not rising. They had roasts for buy one get one free and a dozen eggs were $.99. Sounds like it's going down in my neighborhood.
I don't buy it. Why wouldn't Kraft have secured a foodchain for itself when the economy started to go bad? Why NOT spend some of those billions to buy farms so you can control your supply costs? If Philip Morris really wanted the goodwill of the people, they would have bought farmland or struggling working farms and dairies for stuff other than tobacco farming.
@kwsventures: So true, so true. But to elaborate on your statement...
You can't flood the world with dollars and expect any other outcome.
...that should be "dollars AND credit". The government doesn't actually have to print the money to cause inflation.
This is reminding me all too much of the various "reasons" why gas prices keep fluctuating at the pumps -- and not in a good way. :-( I can't help but think that we (consumers) are being played, guys.
That's fine with me! Those of us in colder areas *need* ethanol in the fuel so we don't have to buy gas line antifreeze. :) More for us!
Oh come on, that is a stupid sign. Why not say "NOTICE TO OUR CUSTOMERS: Milk prices have increased due to rising costs"?
@cabjf: This is true. I just bought a 12-pack of generic for like $6 at a Food 4 Less. Kraft was on sale as well, but it came out to like 90 cents a box. Anyway, my husband has refused to have any Philip Morris products in the house since I showed him Consumerist's list of stuff owned by said company.
@cabjf: Speculation is an important component of our economy. But sometimes people and companies fail predict accurately.
@cabjf:
"Why buy Kraft mac and cheese when the store brand is half the price, especially if you already hurting in this economy or are worried you may be in the future?"
Why indeed.In fact,you are not the only one asking such a perceptive question. Two major grocery chains (Food Lion and Safeway) have recently sent ultimatums to some of the biggest manufacturers of food and other consumer items that if they don't REDUCE their prices,they (the supermarket chains) will pull their product off the shelves. Seems that the high prices are scaring customers away to Walmart,Costco etc.
This sets up the possibility that the manufacturers (Proctor & Gamble,Unilever, Kraft etc.),have decided to "tax" or "punish" the consumers that do not price shop or seek value.
Safeway was just point blank: We will begin pushing our store brands.Unilever told them to piss up a tree. So,the next great battle between sellers and buyers is under way. I hope we win.
@Saboth: No, cow products and grain products were blamed (though largely ignored) on the fact that a lot of farmers sacrificed their corn crops to ethanol speculation. That PLUS the gas hike just screwed the food supply, and those farmers who chose to back ethanol.
@ADismalScience: While all of those things are certainly valid items, I would classify them as expenses, not ingredients in a gallon of milk.
"Manufacturers blame the price increases on futures contracts they unwisely bought"
Trading in futures should be outlawed!
It's why gas went over $4 a gallon and causes more problems for the consumers than its benefits.
@redskull:
I'm with you. While you certainly could say they are ingredients in milk, it was a poor choice of a word.
For example, when I look at a recipe for baking a cake, it doesn't list my working to gain income to buy the other items needed and driving to and from the store as an ingredient for the cake.
So I wouldn't describe the logistical costs of producing milk as being "ingredients".
There must be a reason, or else wouldn't the one manufacturer who lowered prices to reflect cost just pwn all the others? I know I'm a bargain shopper these days. My brand loyalty went out the window several months ago!