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Food Companies: We're Going to Start Raising Prices

It's not just more pain at the gas pump courtesy of spiking oil prices that you need to brace for. You're going to be feeling more pain at the grocery store soon, too, as major food manufacturers say they are planning to raise prices due to soaring commodity costs. At a food industry conference this week, Sara Lee said it may add another 4 to 6 percent to its prices in the second half of the year, on top of an already announced 3 percent rise in the first half of 2011. ConAgra, which makes packaged meals including the Healthy Choice and Marie Callender lines, said it is eyeing a 25 percent increase in some of its prices. At least those are price hikes you can see; some food companies, like Kraft, are opting for stealth moves, including reducing the package size of food or opting for less expensive ingredients.

Here's some, um, food for thought on what's going on with food prices and how to cope:

So much for those reports of low inflation. In the 12 months through January, the official inflation rate in the U.S. was a benign-sounding 1.6 percent. Only problem is, that stat is just for a broad basket of all sorts of goods and services. Narrow it down to just the cost of food, and recent price trends are anything but benign. A smaller basket of meat, poultry, and fish cost 6 percent more this January compared to a year ago, according to the Bureau of Labor Statistics consumer price data. Given that average wages grew less than 2 percent last year, the rise in food prices is indeed taking a bigger bite out of our wallets. Here's a breakdown of some specific food prices that are rising a whole lot more than the general rate of inflation:

12-month price change in selected foods:

  • Butter + 19.6 percent
  • Lamb: +18.9
  • Bacon +11.3
  • Beef & Veal + 9.7
  • Potatoes + 6.0
  • Roast Coffee +5.6
  • Sugar +4.8
  • Eggs +4.8
  • Fresh Veggies + 3.7
  • Fresh Fruit +3.1
  • General Inflation: +1.6

Blame it on bad weather and global demand. As MoneyWatch's John Keefe has explained, a rash of bad weather is hurting farm production pretty much across the globe. Couple that with rising global demand and you've got yourself the recipe for a run-up in commodity prices. Wheat and corn prices are up more than 50 percent in the last year, soybean prices are up more than 40 percent, and the price of coffee is up more than 70 percent and trading at a 30-year high.

On the positive side, commodity prices are a small fraction of food costs. Time for a little bit of good news. When you read a headline about soaring food commodity prices, keep in mind that on average just 20 cents of every dollar we spend on food is tied to the actual cost of the raw commodity, or what's known as the farmer's share. So just because the commodity price has jumped by a given percent doesn't mean that the price for the finished food product will increase by the same amount. The other 80 percent of every dollar we spend on food goes toward processing costs, shipping/transportation and of course, marketing and advertising. The breakdown between farmer's share and consumer cost varies by specific food types; typically commodity prices represent a smaller share of processed foods. For example, according to the National Farmer's Union, just 8 cents of the recent $4.39 cost of an 18 ounce box of cereal is the cost of the grains, while the $1.09 cost for a two-liter bottle of Coke includes just 9 cents for commodity costs (primarily the corn for corn syrup). On the other hand, 79 cents of the $2.59 cost of a dozen eggs is the farmers' share, and $1.30 of the $3.99 price of a gallon of milk is the actual dairy cost. Granted, with the spike in oil prices, transportation and energy needed in the manufacturing process will impact prices, but there are indeed plenty of levers food producers can pull to keep prices down when commodity prices rise.

Keep your eye out for funky packaging. Kraft says it is considering reducing the package size of some of its products rather than raising prices significantly. This is an increasingly popular food industry sleight of hand that allows the food companies to avoid hitting us with sticker shock at the checkout counter, but it is indeed a stealth price hike if we're paying the same for less. Consumer Reports recently found that the size of a carton of Tropicana orange juice has shrunk 7.8 percent, a pint of Hagen-Daazs is actually just 14 ounces these days (a 12.5 percent reduction in size), and the standard package of Kraft American cheese singles is now two slices lighter (an 8.3 percent reduction). Taking the time to actually read the unit-price data on the grocery shelf is your best defense to avoid overpaying for a deceptively smaller package of food. (And if you think the taste of your food or beverages has changed ever so slightly, well, it might not be your taste buds playing a trick on you. Sara Lee says it has been changing up the mix of the types of coffee beans in its coffee products, using more of the cheaper Robusta bean and less of the pricier Arabica bean.)

Give store brands a taste test. If you're feeling the squeeze grocery shopping it's time to try out the private-label store brands, which typically are less expensive than national brands. In fact, Wegmans, an East-coast grocery chain, recently promised it will freeze prices for the rest of 2011 on 40 food staples, most of which are its own store brands. And this MoneyWatch video of a taste test of products at Trader Joe's shows that it's often hard to tell the difference between store and national brands.

Photo courtesy Flickr user qmnonic
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