Monday, April 25, 2011

USDA Raises Food Inflation Outlook Again

Fresh from raising its price outlook on the grains, the USDA has now expanded its inflationary view to include staples such as beef, pork, and even fresh vegetables. Unsurprisingly, some analysts believe the government is understating the scale and scope of food inflation. High prices on essentials such as food act as an implicit tax on consumer consumption in non-discretionary areas.

USDA Raises 2011 Beef, Pork, Vegetable Price Forecast
The U.S. government raised its forecast for retail prices of beef, pork and fresh vegetables, but left its overall food-inflation forecast for 2011 unchanged.

The overall food price-inflation forecast held steady at 3% to 4%, the U.S. Department of Agriculture said in its monthly analysis of the U.S. government's Consumer Price Index for food, which tracks retail prices of everything from milk to cooking oil and steak. But within the report, there are signs that inflationary pressures are approaching the high end of that range, thanks to higher energy costs and the 10-month-long rally in the price of grains.

Retail beef prices are forecast to jump 7% to 8% in 2011, up from a March forecast of 4.5% to 5.5%. The USDA also projected that retail pork prices will climb 6.5% to 7.5%, an increase of one-half percentage point from the prior month.

While several categories within the CPI showed higher inflation, those categories are weighted and weren't enough to push the overall food-inflation forecast beyond the 3% to 4% range.

Still, some private forecasters said retail food prices are climbing more sharply than the USDA is willing to forecast. Michael Swanson, an economist at banking giant Wells Fargo & Co., said Monday that he expects the government's CPI for food to climb 4.5% to 5.5% in 2011.

"There just isn't a single major food category where prices aren't climbing," he said.

Such a sharp acceleration in retail food prices would be a big change from last year, when the CPI for food rose just 0.8%, the mildest food-inflation rate in 48 years. Last year, many food manufacturers and supermarket chains choose to absorb their higher costs rather than attempt to pass them along to consumers worried by the stubbornly high unemployment rate.

For now, food retailers are passing through increased commodity costs, which "could temporarily boost profits across the value chain," Janney Capital Markets said in a note to clients. But ultimately inflation, coupled with consumers balking at higher prices, could pressure retailers' margins as the year progresses, the firm said.

Livestock prices have soared in recent months at the Chicago Mercantile Exchange, driven largely by sharply higher feed costs and expectations of shrinking animal supplies. Prices of cattle futures contracts hit an all-time high in early April, while lean hog futures hit a fresh record last week.

The U.S. cattle herd stands at a more-than-five-decade low, while the U.S. breeding herd for hogs is just above all-time lows.

Meanwhile, grain prices have rallied since last summer on strong demand and disappointing crops around the world that have depleted supplies.

Consumers of fresh produce are also feeling the sting. The USDA projected that prices for fresh vegetables will increase 4.5% to 5.5% this year, up from a prior forecast of 4.0% to 5.0%.

Lettuce, which has been affected by freezing weather in Mexico and Arizona, cost 27.3% more in March than it did a year ago, according to the USDA. Potato prices are up 12.1% during that period and tomatoes are up 10.6%.

The USDA also raised its projected price increase for fats and oils, increasing it to 6% to 7%, up one percentage point.

Source CME News for Tomorrow
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