A lot of ingredients go into rising grocery bills
Booming China, biofuels use, weak dollar mean costs will continue upward
The Associated Press
Oct 8, 2007

Some highlights from this column:

• The Labor Department reports food inflation is running at 4.2 percent annually - twice the rate of overall inflation. Nationwide, milk prices are up 18 percent since the start of the year, while eggs cost 35 percent more than they did a year ago. The USDA estimates overall food price inflation will run 3 percent to 4 percent in 2008.
• The big picture, at least in the U.S., is that higher food prices don’t hurt like they used to. Today, about 8.5 percent of the American household budget goes to food at home, down from an average of 19 percent of the total budget in 1960, Standard and Poors chief economist David Wyss said. While food inflation is high, it’s not hyperinflation, he said.
• The forces behind the rise in food prices - China’s economic boom, a growing biofuels industry and a weak U.S. dollar - are global and not letting up anytime soon.
• China is the juggernaut. Rapid growth there - and in Brazil, Russia, India and other developing nations - has led to massive demand for raw materials, including energy to run factories and cars, metals to build infrastructure and beans and grains to feed livestock and people.
• China will import almost 50 percent of the world’s oilseeds within a decade, becoming the world’s largest importer, according to estimates from the Organization for Economic Cooperation and Development.
• China’s oilseed demand reflects another trend: The world is using more of its food supply to make fuel. Corn in the U.S. and China is being converted to ethanol, a gasoline additive. Europe is using more wheat for ethanol and rapeseed for biodiesel, a cleaner burning fuel that is mixed with regular diesel. Brazil has bulked up its production of sugarcane to make ethanol.
• Demand for corn from the burgeoning ethanol industry in the U.S. helped drive corn prices to a peak earlier this year, setting in motion a domino effect of price increases through the food chain as livestock raisers, food makers and retailers tried to recover costs. A bushel of corn that went for about $2 a couple of years ago costs about $3.50 today.
• Because the markets for raw materials are often linked - both across geography and with each other - problems in one market can spread to another. Take soybeans. When U.S. farmers planted more corn this year to meet demand for ethanol, they devoted less acreage to soybeans. That has squeezed soybean supplies and helped push prices up more than 40 percent since the year began. Soybeans recently cost as much as $10 a bushel, up from $7 a bushel in January.
• In addition, a weaker U.S. dollar has raised foreign demand for commodities, which appear cheaper to buyers abroad. The greenback tumbled earlier this month to an all-time low against the euro. All along the chain, you’re seeing price inflation,” said Wyss.