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CME: High Feed Costs Don't Translate

by 5m Editor
15 August 2008, at 9:04am

US - While US food companies may be struggling under the increasing burden of higher raw material prices, prices have not been passed on to US consumers.

Consumer prices continue to edge higher but the increases are far lower than what we observe in the producer price index. In part, this is due to the way in which both retail and foodservice companies choose to deal with higher costs.

They often have to balance the need to raise prices in order to maintain their margins with the demands of a competitive marketplace and fears of losing customers. From all we hear, however, most companies have already made up their mind that a higher cost structure for raw materials is in place and they are slowly beginning to move to this higher plateau.

The operative word in the above paragraph is slowly. Yes there is talk about high food prices and some items (bread, eggs) have increased sharply in price. The total food component of the CPI in July was up 0.9% from the previous month and is currently up 6% compared to July 2007. But the increase in meat prices faced by US consumers in July was below the overall increase in the price of food.

The ground beef component of the CPI (ground beef making up the largest percentage of beef sold in the US) was –0.1% lower than the previous month and 4.7% higher than a year ago. It is a number that defies belief given the all time record prices for both lean and fat grinding beef raw material prices. Overall, the beef and veal component of the CPI was just 0.8% higher in July and up 4.6% from a year ago. While there may be a lot of fear about sky high beef prices in 2009 that is something that the US consumer has yet to face and therefore talk about consumption cutbacks is somewhat exaggerated.

For now, it appears that some of the cost increases are being absorbed by various segments along the supply chain. Prices for pork chops, that ubiquitous “pork item” in US supermarkets, rose just 0.1% in July and were just 3% higher than year ago levels. As the chart to the left shows, only recently have we seen any real movement in the price of this item, and overall the price increases appear quite modest. Prices for chicken parts were up 1.5% from the previous month, which is a significant increase, and are 4.4% higher than a year ago.

5m Editor