Food price rise could last another two years

You may have to get used to paying more for your groceries for another two years or more.

Experts say an increase in global food consumption combined with increasing use of crops such as corn and soybeans for alternative fuel production are partly to blame.

Agricultural economists who've studied food price fluctuations cite historical trends that show run-ups in farm commodity prices typically happen in five-year cycles.

Prices flare up in the first two to three years of the cycle and then start to moderate by the fourth or fifth year, said Chris Hurt, agricultural economist at Purdue University .

If 2007 was the first year of this latest cycle, Hurt said farm supply could start catching up to demand by 2010, helping to push down milk, bread, cereal and other grocery prices.

Until then, "Americans will be moving backward in their [food] lifestyle." By that he means that more families will trade down to cheaper food alternatives, or eat out less often, in order to adjust their budgets to both higher food and fuel costs.

Wal-Mart (WMT, Fortune 500), the No. 1 discounter and supermarket chain, said Tuesday that spending patterns in its stores already support the trend. The retailer said shoppers are buying more white meat and less red meat, stocking up on larger package sizes and buying more boxed frozen meals as eating at home replaces going out.

"This is the first price boom we've seen since the 1970s," said Bill Knudson, professor of agricultural economics at Michigan State University, agreed. "There's an old industry saying that high prices cure high prices. My personal opinion is that food prices will remain high for another two or three more years."

The good news, however, is that "there's no grave concern" of a pending food shortage in the United States, Hurt said.
Why is food more expensive now?

Experts point to four main global trends for the rise in food prices.

First, growing incomes in developing countries such as China, India, Malaysia mean citizens in these countries are eating better and more frequently, thereby putting more demand on the global food supply.

"People are consuming more quantity and higher-quality foods," said Hurt. "They are eating more meats, eggs, grains and [drinking] milk."

Second, adverse weather patterns over the past four years have harmed crop production in Australia, southern Europe, Ukraine and even parts of the United States.

American Farm Bureau Federation (AFBF) economist Jim Sartwelle said a prolonged drought in Australia - a major wheat and dairy producer - has led to big drops in world exports of wheat and milk.

Third, the United States is normally a big food surplus nation but, "with a weak dollar, there's been a run on our pantry of food supplies," Sartwelle said. "A lot of our excess production is going overseas and this is pushing up domestic prices."

Fourth, burgeoning demand in the European Union and the United States for ethanol and other biofuels has sparked a price surge in corn, soybeans, sugarcane and other commodities used to produce those alternative fuels.

It's not only consumers feeling the price pain, Sartwelle said.

He said that "even with higher retail prices, farmers and grocers get very little increase in their profit margin," because it's being offset by higher packaging costs, energy cost to produce and stock food and fuel to transport products.

Bill Ferriera, president of the Apricot Producers of California, also sees a bump-up in the costs of farming.

"Fertilizer costs have doubled from last year and farm labor availability is a big problem," he said. "Many farmers are choosing not to grow produce that is labor intensive."

Despite these food price hikes, Americans still spend only about 10% of their disposable income on food and beverage purchases per year, according to the Department of Agriculture.

That's below the 15% share of disposable income that Europeans spend on food and drinks, and the whopping 70% that citizens of Pakistan and Bangladesh budget for consumables, said Hurt.

So even with a 4.5% expected rise in overall food prices, Americans, per person, will only spend an extra $87 this year on groceries, according to the Economic Research Service of the Department of Agriculture.

But that's little consolation for consumers whose budgets are already stretched amid the the worst food price inflation in 17 years, according to government reports.

The latest nationwide quarterly survey from the AFBF, which tracks supermarket prices for 16 basic grocery items, showed the total cost of its basket of goods rose to $45.03 in the first quarter of 2008, up 8% from the prior quarter.

Products with the steepest retail price jumps were a 5-pound bag of flour, up 69 cents to $2.39; cheddar cheese, up 61 cents to $4.71 a pound; corn oil, up 58 cents to $3.01 a 32-ounce bottle; and dozen large eggs, up 55 cents to $2.16.

But higher prices aren't here to stay, Hurt said. He's confident that producers will allocate more land to production over the next two to three years. "I expect greater use of technology to increase crop yields and better use of genetics to create drought-tolerant crops," he said.

Knudson said the United States this year is expected to dedicate 2 million acres of land from its federal Conservation Reserve Program to farming in order to increase production during lean times.

"In Canada more land will also be committed to farming this year," he said. "All this should help to eventually increase food supplies through the [price] boom cycle."

Source: Cnn

Dollar falls after Fed

The dollar fell against a mixed bag of currencies and long-term treasury prices retreated from their highs Wednesday after the Federal Reserve announced it again is cutting interest rates.

In a widely-anticipated move, the central bank trimmed its key federal funds rate by a quarter of a percentage point to 2%. But the Fed also signaled its intention to put rates on hold to fight inflation.

The Fed's decision follows a government report that indicated the economy continues to be hampered by higher energy and food prices. The Commerce Department estimated that the U.S. gross domestic product during the first quarter rose at a very modest seasonally adjusted annual rate of 0.6% during the first quarter, though the figure came in better than the market anticipated.

Joe Balestrino, a portfolio manager at Federated Investors, said most fixed-income investors are focusing on what the central bank says about the economy. He said recent statements by the Fed have taken a softer tone in describing economic conditions, indicating that its rate cut campaign has been working.

"They've acknowledged strains in the financial markets driving their monetary policy, and those strains have now been somewhat reduced," Balestrino said. "Right now you have the combination of an economy that stopped going backward, and a financial market that has significantly improved."

Treasurys: The 30-year long bond rose 14/32 to 96 20/32 and yielded 4.58%, up from 4.38% just prior to the Fed's announcement, according to BGCantor Market Data.

Prices and yields move in opposite directions.

The benchmark 10-year Treasury note rose 3/32 to 97 15/32 and yielded 3.75%. Bond prices and yields move in opposite directions.

The 2-year note fell 5/32 to 99 22/32 and yielded 2.27%, down from 2.40%.

The Treasury Department said Wednesday it plans to sell $21 billion of new securities in its quarterly refunding. The government plans to auction $15 billion of 10-year notes on May 7 and $6 billion of 29 1/2-year bonds on May 8.

In addition, the Treasury said it plans to revive the sale of one-year bills as a way to raise money to combat the federal budget deficit. The government said the economy's decline has hurt tax receipts, and increased its funding needs.
Check the latest currency rates

Dollar: The dollar fell against foreign currencies after the Fed's announcement.

The euro bought $1.5615, up from $1.5564 just prior to the release, and the British pound rose to $1.9877 up from $1.9847.

The dollar rose versus the yen to ¥103.95, down from ¥104.55 before the Fed.

Lower interest rates can boost the economy, but they tend to be inflationary, leading traders to transfer funds to countries where they can earn higher returns.

Source: Cnn

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Japan holds the line on interest rates

Japan's central bank decided Wednesday to keep its key interest rate unchanged amid lingering worries about a global slowdown.

The Bank of Japan policy board meeting unanimously decided to keep the rate at 0.5%, the bank said in a statement.

The decision was widely expected amid continued uncertainty over the U.S. economy and its impact on global markets.

Japan's economy is slowing, and the bank will carefully examine downside risks at home and abroad before taking any concrete monetary policy steps, the policy board said in its semiannual outlook report released later Wednesday.

Housing and business investment "have been weaker than expected while exports have been stronger," the BOJ said, adding that capital spending will pick up gradually in fiscal 2008, which ends March 31, 2009.

The bank said uncertainty over the global economy and financial markets persists, citing "downside risks" to the U.S. economy as a potential threat to Japan.

"Given the current situation where the outlook for economic activity and prices is highly uncertain, it is not appropriate to predetermine the direction of future monetary policy," the report said.

It said the bank will "carefully assess the future outlook for economic activity and prices."

Higher CPI expected. For next fiscal year, the board said it expected the consumer price index, which excludes fresh food prices, to rise by 1%, and real gross domestic product to rise 1.7%, compared with 1.5% growth for financial year 2008.

The market was also awaiting signs about the future direction of monetary policy from comments later in the day from new Bank of Japan Gov. Masayuki Shirakawa.

Wednesday's decision is the first since Shirakawa took the helm of the central bank earlier this month. His assumption of the post followed weeks of a power vacuum after the term of his predecessor, Toshihiko Fukui, ended in March.

Much of last year, market watchers had expected the BOJ would soon start raising its key interest rate. The global economic turmoil set off at midyear by the U.S. subprime mortgage crisis has scotched that view.

Source: CNN