December 19, 2008

2008 was an interesting economic year. Housing prices fell. The dollar weakened, strengthened a bit and then weakened again. Commodity prices soared, pulling fuel and grocery bills along with them. But in the fall, commodities began leveling off and oil dropped to around $40 a barrel. Gasoline prices followed, hitting a number many people thought they'd never see again. But food prices are still up there.

"Historically, retail food prices are ‘sticky," said Larry Jones, agricultural economist with the University of Kentucky College of Agriculture. "What that means is that retail prices increase very slowly as commodity prices go up, but at the same time retail prices are very slow to decline once commodity prices go down."

Jones said U.S. retail food prices in 2008 increased at the fastest rate in nearly 30 years. And many analysts believe when all is said and done, the Consumer Price Index for food will have increased close to 7 percent in 2008, with a similar outcome in 2009.

It's not just commodity prices that have pushed up the price of food. As global population expands, so does demand. China and India are among the rapidly developing nations that are responsible for increasing demand not just for food in general, but for meats and processed foods, specifically.

That would be well and good if supply were keeping up with demand. But Jones says that world production increases have been steadily slowing as a result of less available land and slowing increases in annual productivity.

Interest rates were kept low to stimulate economic growth, but the low rates contributed to the devaluation of the U.S. dollar. A weak dollar keeps the price of imported foods high. Jones said there is a tradeoff, however. Our food exports are less expensive to the rest of the world, which stimulates U.S. export markets.

For all of that, food prices did not rise as high as they could have, which also has an effect on how far they will eventually drop.

"Retail pricing of food appears to be predicated on the assumption that consumers dislike fluctuating prices on something as basic as food," Jones said.

As an example, he gave the fact that wholesale food prices increased approximately 8 percent in each of the past two years. Yet the retail price of food increased less than 5 percent on average each year.

"As commodity prices increased, retailers absorbed the increase, but now as commodity prices decline, retailers are not following suit by lowering prices at the retail level," he said.

"Remember, too, the farm share of a hypothetical retail food dollar is about 20 cents, meaning the other 80 cents goes for such things as transportation, utilities, packaging, processing, advertising and profits. In other words, agricultural commodities represent a relatively small portion of the cost of food at the retail level."

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