June 27, 2008

While flood damage to crops in the Midwest is not yet calculated, consumers are dealing with the effects of inclement weather from around the world at the grocery store and could be for some time, said Larry Jones, agricultural economist with the University of Kentucky College of Agriculture.

"It looks like food prices this year are going to go up at least seven and maybe 8 percent, and that's due to a host of factors, which includes weather," he said. "I don't see any let up for the next year-and-a-half to 2 years."

Since last year, the average cost of food has increased about 5 percent. So far this year, the largest food sector increases are in fats and oils (12.8 percent), dairy and dairy products (11 percent) and cereals and bakery goods (10.5 percent).

 The Midwest is one of several areas in the world that had crops destroyed by extreme weather conditions. A cyclone caused catastrophic damage last month in Myanmar, and Australia is dealing with a 6-year drought.

These weather events are just one part of the cause of increasing food prices. The rising costs are also due to increased demand from growing economies wanting better diets, higher input costs and more demand for bioenergy production. The weakened dollar, which has caused higher import prices and increased U.S. exports, is another factor.

The skyrocketing corn and soybean prices have caused producers to react in different ways depending on the amount of risk they are willing to take. Some are selling. Some are locking in prices on the futures market, and some are waiting for further increases.

As those prices continue to go up, so does the cost to the consumer, and the biggest price increases for some areas of the food sector may still be on the way. Jones said he expects the costs of meat and dairy products to increase as livestock producers continue to deal with the high costs of corn and soybeans. Meat is the sector with the lowest increase so far this year at 2.6 percent, but livestock producers are acting against the high prices of feed and fertilizer by reducing their herds. The increase in supply is keeping costs down for now, but it could be short lived.

"Once this little supply works its way through, there are going to be fewer animals on the market in the next 12 to 18 months, and that's when you're really going to see meat prices go up," Jones said.

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