Published on: October 20, 2008The Wall Street Journal reported over the weekend that while grain and soybean prices have dropped by 50 percent in the last few months, consumers should not expect grocery prices to follow suit.
Here’s how the Journal put it: “Food companies are typically quick to pass along higher commodity costs on the way up, slower to reduce prices on the way down. That could bring a continuing run of profits for packaged-food companies even as consumers add higher food prices to the pressures they face from falling housing values and shrinking credit.”
And, the Journal notes, “The U.S. Agriculture Department expects food prices to increase as much as 5% next year, following an estimated 6% gain this year.”
At the same time, the Washington Post carried a similar story, saying:
“Worries over a global recession have pushed the price of oil to its lowest in over a year. Don't expect the same for a bottle of beer, a tube of toothpaste, or a box of cereal.
“You can blame ‘sticky’ prices. That's what analysts call it when companies slap higher prices on products and keep them there even though the rationale for the price hikes - such as soaring oil prices - is gone.
“The falling cost of oil could help companies pad their profit margins as they pay less to make and transport goods. But it won't mean a break on the average grocery bill.”
The Journal also writes that “Food companies have outperformed the broader stock market in the last three months, with their shares down 18% versus a 29% decline for the Dow Jones U.S. Total Market Index.”
The Post piece says that “the one factor than can drive prices down is a drastic drop in demand, but few economists expect the global economic downturn to be so severe it would cause widespread deflation, he said. More likely is that inflation will slow or possibly flatten.”
There is some rationale for the continuing high prices. For example, according to the WSJ, “Some food companies' costs remain higher than this week's commodity prices because the companies locked in contracts this summer when, for example, corn was selling at more than $7.50 a bushel. This week, corn dipped below $4 a bushel for the first time since last December. It closed Thursday at $3.84 a bushel.”
- KC's View:
- I can certainly relate to the corn scenario. In the Coupe Household, thinking that oil prices would continue to rise, we locked in a heating oil price about three month ago…and now, as oil prices drop, that looks like a pretty stupid move. Who knew?
We’re going to see a lot of this. It probably is a pretty safe bet that few if any of the airlines will be reducing their luggage surcharges now that fuel prices have dropped. In some ways, they’re probably thrilled to have found a pricing model that works.
It seems to me that food retailers and manufacturers may have to be more sensitive to the mood of consumers on this issue than in the past, because shoppers will be better able to communicate their discontent among themselves via the Internet. Shoppers may actually be able to apply some pressure on the food industry to be more reactive to lowered commodity costs.
Just a thought. Be prepared.