USDA Food Price Inflation Projections for 2008 Have Just Been...Inflated.

The USDA has just raised its expected food inflation numbers to 6% for 2008 on the heels of a 4.2% increase for 2007.

http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml

My best guess is that they will be back to the well to up that again by the end of the summer. The projections show the greatest increase in food prepared at home with eggs, dairy and fats and oils categories leading the charge. Pork is estimated to increase only 1-2 percent this year.

This is all done in the context of the careful explanations that a variety of events are responsible including increasing global demand, increasing demand for US exports, the rise in oil prices and corn diverted to ethanol production. They all bend over backwards to explain that because of the marketing bill, the price of commodities in the retail price to consumers is not a big driver of price increases. All of that is true but it is not the whole truth.

What is being implied is, even with corn over $6.00 a bushel, pork is only rising 1-2% at retail. If you believe for one minute that $6.00 corn is not going to significantly raise the price of meats in this country then you are drinking their kool-aid. Even though it is part of the normal seasonal pattern of price increases, we have watched the Carcass Carlot Pork Cuts Composite price rise from a low below $55/cwt on the first of April to over $82/cwt with a 2 million head plus a week kill. That is testimony to the demand side of the market clearing this huge runup in production that was planned and executed over the last three to four years when record profits and low corn prices were the situtation. The pipeline is still full of both U.S. and Canadian pork and will be for months ahead. As I have pointed out previously in this blog, you will need to wait until next Spring at this time to see the full impact of corn prices on pork in the retail case. When that happens, the increase in egg prices will be a distant memory.

Retailers will not suffer reduced margins forever as they attempt to shield their consumers from "price point" shock. All of the cute tricks (like my 10 lb bag of BBQ briquets I purchased this weekend is now a 9 lb bag with very little if any change in the size of the packaging) will not be able to shield us from the full realization of the cost of the ethanol decision.

I just keep trying to imagine what the U.S. government and farm groups would have done five years ago if a reliable fortune teller told us that one third of the US corn crop would be destroyed every year beginning in 2008. It would have been considered a disaster of epic proportions.