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What's Driving Up Grocery Prices?
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What's Driving Up Grocery Prices?

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What's Driving Up Grocery Prices?
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MICHELE NORRIS, host:

Ephraim Leibtag is an economist with the Economic Research Service at the U.S. Department of Agriculture. He tracks retail food prices, and he helps with government forecasts about where those prices will go. He joins me now in the studio.

Welcome to the program.

Mr. EPHRAIM LEIBTAG (Economist, Economic Research Service, U.S. Department of Agriculture): Hi.

NORRIS: So first off, we heard Jason Beaubien report on this knock-on effect of diverting corn into fuel. How big of a factor is that?

Mr. LEIBTAG: Well, it plays a role in almost any product that uses corn as an input. The majority of corn in this country is still going towards animal feed, so animal products are the place that you see it first. And of course anything that has corn as an ingredient, including corn syrup, corn meal also will be affected by this.

NORRIS: So corn syrup, in that case, we're talking about everything from ketchup to salad dressing to fruit juice?

Mr. LEIBTAG: Yeah. We've already seen in the last year and a half food prices rising faster than they have in a long time. The types of corn vary from different products, and the majority is still used towards animal feed. But even these other items that have the sweet corn in them do have a kind of secondary effect.

NORRIS: And to what degree do transportation costs drive up?

Mr. LEIBTAG: Well, energy costs rising have been a huge factor in the last two or two-and-a-half years for all business. But certainly for the food business, because so much of our food is transported across the country. A lot of the efficiency gains that we have in food production over the last 20 or 30 years are due to cheap energy and the ability to mass produce in one area and then distribute across the country, or at least across a region. With the higher transportation cost, that comes much more difficult.

NORRIS: So what else is driving up the cost of groceries?

Mr. LEIBTAG: Well, the biggest issues right now that have changed, deviated from kind of our recent history, have been the extremely high energy prices, of course, the last two years and the sharply higher commodity cost we've seen as of late. Corn prices, as we've mentioned already, near record highs. At the same time, soybean prices which are used in a lot of cooking oils and other processing have gone up, again, because of that tradeoff. If you're producing more corn, putting more acres towards corn, there are fewer acres remaining for soybeans. And then, kind of separate from that, we've seen near-record highs in wheat prices. So grains and those products, also right now, are increasing at a rapid rate.

NORRIS: It sounds like there's this perfect storm of all these things happening at once.

Mr. LEIBTAG: It has been over the last year, year and a half. We've had a perfect storm almost in terms of factors that would cause food price to increase in a way they haven't in a long time.

NORRIS: Not so perfect for consumers, though.

Mr. LEIBTAG: It does raise food prices for consumers at the retail level.

NORRIS: Now, food prices are going up here in the U.S. Just in the U.S., or are grocery prices are going up in other parts of the world as well?

Mr. LEIBTAG: Well, food-price inflation is kind of a global phenomenon now. Demand is very strong, especially in growing economies as incomes and standards of living rise. Consumers in other countries are adjusting their diet, perhaps to a higher quality level. In some cases, a higher quantity and in that case as demand is stronger, that pushes up food prices. So strong global demand is part of the reason why we've seen high food inflation here in the U.S., but at the same time, we've seen even stronger effects in other countries.

NORRIS: So when you talk about emerging economies, you're talking about places like China, India.

Mr. LEIBTAG: China and India primarily are the two that we think of, come to mind, very large populations, growing economy, middle-class expanding, and demand for certain food-processed-machine meats and higher quality grain rising.

NORRIS: What does this mean for organic farmers, for those dairy farms, for instance, that produce organic milk or cage-free eggs that are generally more expensive?

Mr. LEIBTAG: In terms of cost, if their inputs are other - let's say, grass-fed versus corn-fed animals, that could make a big difference because if they're not using much corn or any corn in the feeding process, they're not dealing with that higher cost.

On the other hand, let's say, with the cage-free or operating cost difference, those still remain. The higher cost of producing perhaps a higher quality or different quality item are still going to be there. So for organic products overall, you're still going to see that premium. The only difference is you would see it in terms of the input cost differences.

NORRIS: Now, we're hearing that milk prices have jumped 26 percent, egg prices 40 percent. What do you see when you look into the future? Where do you project prices will go from here?

Mr. LEIBTAG: Well, I think that dairy and eggs are two of the extreme cases from 2007. Those were actually two of the highest that we saw, and a lot of that had to do with the extreme volatility in the wholesale and farm-level markets for those products. In general, with this high commodity cost increases, the less processed items, you know, dozen eggs, gallon of milk, those items are feeling the brunt of this more quickly and at a greater rate. Going forward, some of those, in terms of eggs and milk specifically, we see moderating.

On the other hand, for 2008, the more processed and packaged items that maybe haven't been hit by the full inflation yet, are going to be rising. So the fats and oils category, the cereals and bakery product categories, those items are kind of leading the way in 2008.

NORRIS: Ephraim Leibtag, thanks so much for coming in to talk to us.

Mr. LEIBTAG: You're welcome.

NORRIS: Ephraim Leibtag is an economist with the USDA here in Washington, D.C.

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