by Marc Bastow | August 30, 2012 10:00 am
Have you noticed that your morning bowl of Wheaties costs more than it used to? Or that the bacon strip next to your sunny-side-up egg at the neighborhood diner just jumped up in price?
Of course you have.
Any study you read by any legitimate source (say, the U.S. Department of Agriculture) predicts prices will continue to rise for food on every level and across every section of the food pyramid.
The prices for both these commodities is higher today than last month. And unfortunately for us, there’s at least five reasons they’ll continue to climb for the foreseeable future:
1. U.S. Drought Conditions: The waste laid to corn (NYSE:CORN) and soy (NYSE:SOYB) in the American Midwest is well-documented. Fields lay fallow and parched across the Midwest as they bake in a summer-long heatwave. The USDA claims 1,600 counties in 32 states are natural disaster areas. Smaller harvests mean supply is low, which means prices rise even if farmers have hedged prices through the futures markets in advance.
It might be a slow rise, but the drought is felt across such a wide swath of end products: the cost of eggs, pork and beef will continue to rise since the cost for wheat and corn — both staples of livestock feed — are increasing. This hits companies like Tyson Foods (NYSE:TSN) and Pilgrim’s Pride (NYSE:PPC). Supply and demand works here too: China and India are rabid consumers of corn and soybeans, putting further pressure on limited supplies.
2. That “Other” Drought: Thought we were alone? Think again. While corn is constantly crowed about, less publicized is the jump in wheat (NYSE:WEAT) prices thanks to similar conditions in Russia. Things are so bad that there are fears that the world’s third-biggest wheat exporter might limit what it sends out of its borders. Wheat’s behind flour, breads, pasta, cereals and (most importantly) beer. Think General Mills (NYSE:GIS) and others.
3. Gas Prices: Well, you didn’t think oil was going to keep falling forever, did you? Oil is a global commodity, with supply and demand the only driving factors. Iran, Hurricane Isaac … you name it, and if it affects global shipping or production, it will reflect in gas prices. Falling fuel costs earlier in the year helped keep a lid on food prices, but gas prices are rising, and the costs eventually will get passed on.
4. Government Regulations: These are a bone of contention among farmers, suppliers, regulators and, of course, the buying public. Food safety programs outlined by the Department of Agriculture are critical, and in some cases, costly to producers. Included in the rising cost of egg prices, for example, are regulations intended to improve laying and living conditions for hens. The hens might benefit (and so might our stomachs), but farmers complain that meeting demands like this one cost them money — and in some cases, their farms — and consumers end up pay eventually.
5. Profits: Profits still are king, and food companies aren’t in the game to be nice. Some occasionally will eat increased prices in supply and distribution chains, but not all of them. Price increases usually get passed along, for as long as they must to drive profit and “increase shareholder value.”
Keep an eye on these five factors heading into the fall, and in the meantime, maybe go to Costco (NASDAQ:COST) and stock up on those Wheaties in bulk.
Call it your own futures contract.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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