Why Food Prices Are Soaring, Likely To Continue by Gary D. Halbert

June 3, 2014

FORECASTS & TRENDS E-LETTER

IN THIS ISSUE:

1.  Consumer Food Prices Are Skyrocketing

2.  10 Fastest-Rising Food Prices at the Supermarket

3.  California is in Big Trouble! So Are We All

4.  Drought Monitor Chart For Continental US

5.  Incurable Disease Threatens Florida Citrus Crop

6.  Latin America Coffee Blight Sends Prices Skyward

7.  “The Solution to High Prices is High Prices”

Overview

Do you know that the US state which produces the most vegetables by far is going through the worst drought it has ever experienced? Do you know that the size of the total US cattle herd is now the smallest that it has been since 1951, even though our population has doubled since then? Do you know why bacon prices are up 55% or more in the last few years?

As you are no doubt aware, food prices are soaring higher and higher. As we’ll see below, one widely-followed food price index is up almost 21% in less than a year. The question is, why have food prices risen so sharply in the last few years? That’s what we’ll talk about today.

Soaring food prices are largely due to bad weather over the past several years. Droughts across much of the Western US and Texas pushed grain prices to record highs in recent years, boosting feed costs and forcing ranchers to pare back their herds. That, in turn, has significantly increased the cost of meat and dairy products across the country.

The prices of many vegetables and fruits have also shot up as a result of the severe drought in California and dry weather across much of our country’s agricultural heartland over the past few years. In addition to severe droughts, new incurable (so far) diseases are ravaging our hog herd and crops in Florida, Latin America and elsewhere.

If drought and disease that have been devastating farmers and ranchers continue, we are going to see prices for meat, dairy, fruits and vegetables soar even higher than today’s levels. Already, the federal government has declared portions of 11 states to be “disaster areas,” and California farmers alone are believed to have left up to 800,000 acres (7%) sitting idle this year because of the extremely dry conditions and lack of water.

Consumer Food Prices Are Skyrocketing

The graph below shows the CRB/BLS Foodstuffs Index which tracks the spot price of 10 agricultural commodities: butter, cocoa, corn, hogs, lard, soybean oil, sugar, Minneapolis wheat and Kansas City wheat. Since touching a 1-year low on December 19 last year, the Index has shot up by nearly 21% to a new 1-year high since then.

Food Prices

Food prices are often volatile and are affected by a number of factors. While certain factors reflect human decisions – such as the changing tastes of consumers and farmers’ planting choices – others are forces over which farmers and ranchers have very little control. Issues such as weather conditions and diseases can cause severe supply shortages that cause the price of products to rise.

As we will see below, a multi-year drought across much of the west has sent prices soaring for meat, dairy, vegetables and fruit. In addition, a relatively new hog  virus – Porcine Epidemic Diarrhea Virus (PEDV) – can be deadly to newly-born pigs, and has cut into hog production significantly. As a result, bacon is the fastest rising food price on the market.

The 10 Fastest-Rising Food Prices at the Supermarket

Here are 10 foods that have risen the most in price over the last few years based on April prices, as measured by 24/7 Wall St./USA TODAY:

1. BACON
4-yr. change: +53%
Current price: $5.55 lb.
6. MARGARINE
4-yr. change: +30%
Current price: $2.11 lb.
2. GROUND BEEF
4-yr. change: +35%
Current price: $4.13 lb.
7. WINE
4-yr. change: +25%
Current price: $10.71 liter
3. ORANGES
4-yr. change: +35%
Current price: $1.21 lb.
8. TURKEY
4-yr. change: +24%
Current price: $1.73 lb.
4. COFFEE
4-yr. change: +31%
Current price: $5.00 lb.
9. CHICKEN
4-yr. change: +22%
Current price: $1.54 lb.
5. PEANUT BUTTER
4-yr. change: +30%
Current price: $2.71 lb.
10. GRAPEFRUIT
4-yr. change: +22%
Current price: $1.02 lb.

Some of these foods have continued to go up in price since the April figures quoted above, in some cases significantly higher. As the primary cook in the Halbert household, I’m in our local supermarket several times a week, and am well aware of these price increases and others.

I’m sure that most of you know that food companies are cutting down the quantity of food in their packages while leaving the prices unchanged, hoping that consumers won’t notice. Be sure to check the labels closely. A lot of formerly 16-ounce packages now contain only 12 ounces, but the price is still the same. Be smart!

California is in Big Trouble! So Are We All

The Golden State is in the midst of the worst and longest drought on record. 2013 was the driest year ever recorded for the state, and 2014 has been exceptionally dry so far as well. In times of drought, crop production falls significantly. Decreased availability of above-ground and below-ground water sources most often result in a reduction in the number of acres planted.

California depends heavily on the snow pack in the Sierra Nevada mountains. As the snowpack melts each spring, much of it makes its way into CA streams, rivers, lakes and eventually into its vast underground aquifers. Unfortunately, this winter’s snow pack was only apprx. 15-17% of normal.  Take a look at this drought map:

Food Prices drought map

As you can see, the entire state of CA is in one stage of severe drought or another. This is the third year of drought in many areas. About 25% of the state is in “exceptional drought,” the most severe rating. Over three-fourths of the state is in “extreme drought,” the next most severe.  The rest is in “severe drought.” Some climatology experts fear that this drought could go on for several more years.

So far this year, rain across most parts of California has been minimal and the rainy season is over. With the exception of a brief period in early February, the growing regions have been mostly dry. Making matters worse, a strong high pressure system developed and brought a record-breaking early-season heat wave to much of the state.

A number of daily high temperature records were set over a multi-day period over a geographic region spanning the far North Coast (near Eureka/Arcata) to the Mexican border (including San Diego County). Remarkably, the afternoon high temperature recorded at the San Francisco Airport on April 30th was higher than any recorded temperature during all of calendar year 2013.

This spring’s heatwave also coincided with the occurrence of powerful Santa Ana winds in Southern California, with the typically windier mountain peaks seeing gusts in the 100 mph range. These high winds – combined with ongoing extreme drought conditions – led to extreme fire weather conditions, and several wildfires did ultimately break out. It could be a very long summer for CA’s firefighters.

In the meantime, many of CA’s farmers will have to rely on pumping an estimated five million acre-feet of groundwater from underground lakes, known as aquifers. The aquifers are a relic of the era when the Pacific Ocean covered much of the state. California has over 850 million acre-feet of water stored in

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