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The Future of Food Prices: What Will Food Cost in 2015?

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A look at the increases you can expect at the grocery store, according to a former ConAgra economist.

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The current prices in your grocery store don't presage an approaching storm. But that's exactly what's coming, says Bill Lapp, president of Advanced Economic Solutions, a consulting firm in Omaha, Nebraska, and the former chief economist for ConAgra Foods (CAG).

In the last nine months, he says, the prices of corn and wheat have doubled; the price of corn alone (nearly $7 a bushel) is three times higher than the previous norm. Lapp estimates that the higher prices for these commodities -- for the grains we eat and those used to feed livestock -- amounts to some $40 billion in costs not yet passed on to the consumer. But the higher price tags are coming "sooner rather than later," says Lapp. He calls it a "big liability in front of us."

There are several reasons for the accelerated rise in grain prices: demand for foodstuffs from developing countries, like China and Brazil; weather events (such as last year's severe drought in Russia) that stretched already-tight stocks of grains; a weak US dollar; and the US biofuel policy that taps corn for ethanol.

Although the American public may not be aware of the lag time between the rise in commodity prices and an increase in wholesale food prices, in countries like China, India, and in parts of the Middle East, where food processing is less prevalent than in the US and groceries occupy a greater share of individuals' budgets, people are already finding that out. In January, the UN World Price Food Index reported a year-over-year increase of 28%. Many believe that increased food prices played a major role in the current unrest in the Middle East.

So what can Americans expect? What will basic groceries cost us one year from now, or four years from now, in 2015? To find out, we asked Lapp to analyze the major categories of groceries, as defined by the benchmark Consumer Price Index (CPI), and measure the share of their costs related to commodities.

(Roughly one-third of the cost of groceries depend on the underlying commodities, and the rest of the cost reflects non-commodity attributes like labor, manufacturing, packaging, and distribution, which have seen modest increases in recent years.)

Taking several complicated factors into account, Lapp's prediction is that overall consumer prices -- as measured by the CPI -- will rise an average of 3-4% annually from 2011 to 2015. Over that period, he expects to see a higher rate of increase in the early years -- because of the already substantial increase in commodity prices about to find its way into grocery stores. He expects the meat industry -- where corn is commonly used as feed for livestock -- to experience the most dramatic spike.

Using Lapp's analysis, Minyanville looked at how much our regular trip to the grocery store might cost in 2015 compared to now. We used current retail prices -- averages recorded for US cities by the Bureau of Labor Statistics -- to find our baseline costs. (In Canada, we used prices from Statistics Canada citing average prices for February 2011.)

Here's what we discovered in eight major categories:

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A LOAF OF WHOLE WHEAT BREAD

Typical price in 2011: $1.85/lb

Estimated price in 2015: $2.16/lb

Predicted annual price increase for all cereal products: 4%

A LOAF OF BREAD
You'd have trouble finding a more popular kitchen-cabinet staple than a loaf of bread. As many consumers have noticed, the price for this basic good has already moved up, and not insignificantly, by 7% in 2010. But the cost of wheat has doubled in less than a year, so the price of a standard loaf of whole wheat bread is set to rise even further.

Lapp expects the cost of all cereal and baked goods to increase by 3-5% annually. That means that the average retail price for a loaf of bread should come in around $2.16 in 2015.

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A GALLON OF MILK

Typical price in 2011: $3.30

Estimated price in 2015: $3.86

Predicted annual price increase for all dairy products: 4%

DAIRY PRODUCTS
Like the meat industry, the dairy industry is at the mercy of the price of corn for much of its feed costs. So the next few years will be a one-two punch for American consumers of dairy: Higher feed costs will move up the price of milk, cheese, and butter, and rising demand from developing countries may push up the global price for milk, requiring Americans to shell out more at the local store.

Lapp estimates an annual average increase of 3-5% across the dairy category. Currently, a gallon of milk retails for an average price of $3.30. That can be expected to rise to close to $4 in four years. It may not seem like a lot, but a bowl of cereal and milk might become noticeably pricier.
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GROUND BEEF

Typical price in 2011: $3.59/lb

Estimated price in 2015: $4.71/lb

Predicted annual price increase for red meat: 7%

GROUND BEEF
The meat industry has already started to pass its higher costs onto the consumer. In 2010, the price of ground beef went up about 7%, according to the CPI. "We've begun to see the dynamics of that market affecting prices now," says Lapp.

Because of higher feed costs, meat producers have lowered per capita supplies of all proteins, he adds. But export demand from developing countries is strong. Not surprisingly, the USDA forecasts record prices for protein items like beef and poultry; the price of live cattle already stands at record prices.

Ground lean beef currently averages $3.59 per pound, and Lapp expects the largest increase in consumer prices to come from meat and poultry, at 5-8% annually. If he's right, beef won't be a bargain in 2015, when the same pound may cost close to $5. It could be enough to turn many Americans into vegetarians.
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CHICKEN

Typical price in 2011: $3.21/lb

Estimated price in 2015: $4.37/lb

Predicted annual price increase for poultry: 8%

CHICKEN BREAST
The poultry industry has so far adjusted the least to higher feed costs, Lapp says, which means a major correction is likely. Producers are expected to bring supply and demand to a point where they can break even, and perhaps turn a profit. In other words, consumers are probably in for the greatest sticker shock when they arrive at the poultry section.

American consumers won't have much influence in affecting poultry prices, either. "It's a global market," Lapp explains, and so as the newly well-to-do in countries like China, Brazil, and India acquire a taste for meat, Americans will have to pay more. Strong export demand is "the risk that stands out to add more fuel to the fire," Lapp says.

A pound of boneless chicken breast averages $3.21 per pound this month, but with an annual increase at the top end of Lapp's range, it could check in at $4.37 per pound in 2015.

In New York City, where we recently saw chicken breast on sale for $6.99, the projected annual increase could mean a 2015 price of $9.50 per pound.

It's enough to spell trouble for everything from our own kitchens to the fast-food menus of places like Kentucky Fried Chicken (YUM) and McDonald's (MCD), and high-end restaurants.
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BROCCOLI

Typical price in 2011: $1.91/lb

Estimated price in 2015: $2.15/lb

Predicted annual price increase for fruits and vegetables: 3%

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BANANAS

Typical price in 2011: $0.60/lb

Estimated price in 2015: $0.68/lb

Predicted annual price increase for fruits and vegetables: 3%

FRUITS AND VEGETABLES
Fruits and vegetables will be the one area where prices shouldn't rise that noticeably. Naturally, grain prices don't figure in their costs, and so factors like labor, weather, and the price of oil determine the prices of produce. That said, the likelihood of severe weather events because of global warming and consistently elevated crude prices won't do consumers any favors in the produce aisle.

Lapp expects a 2-5% annual increase for items that don't rely as much on grains -- everything from produce to frozen dinners and canned products. Take the most basic of these. Broccoli these days sells for $1.91 per pound, and with an increase of 3% it will fetch a quarter more than that in 2015. As for bananas, the most popular fruit in the world, the cost shouldn't go much higher than $0.70 per pound, about a dime more than its current price tag.
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MARGARINE

Typical price in 2011: $1.24/lb

Estimated price in 2015: $1.51/lb

Predicted annual price increase for all vegetable oils: 5%

VEGETABLE OILS
Besides meat products, the fats and oils category has seen the largest year-over-year increase (3.8%), as reported by the CPI. Vegetable oils originate from many different inputs, but soybeans make up the standard blend. And the price of soybeans have lifted off since last September, rising nearly one-third.

In addition, vegetable oils aren't just used for cooking; they're also hidden as small components in processed foods. So the rise in soybean prices will manifest across many different products. Lapp says an annual increase north of 5% wouldn't surprise him.

So for margarine, a standard byproduct of fats and oils, expect a stick of the non-butter to cost around $1.50 in four years.
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A SIX-PACK OF BEER

Typical price in 2011: $5.34

Estimated price in 2015: $6.25

Predicted annual price increase for beer: 4%

BEER
In 2015, your burger and a beer special might not be such a bargain any more. The burger will almost certainly cost a lot more. And the beer?

The process of making beer involves brewing and fermenting mainly cereal grains, namely barley, wheat, corn, and rice. The prices of these grains have all skyrocketed, not the least because of bad weather in Europe. In addition, the past few years have seen worldwide shortages of hops, the necessary ingredient in brewing beer.

Just as $3 gasoline has become the new norm, in four years you would be hard-pressed to find a six-pack of domestic beer for less than $6. Right now, the retail price for your average six-pack nationwide sells for $5.34; by 2015, that could go as high as $6.25.

In New York City, a six-pack of Budweiser (BUD) was recently on sale for $7.49 at a major, regional grocer. Shoppers may need to pony up an estimated $8.76 for the same beer in 2015.

For consumers, this specter of higher prices across the board is enough to make anyone sober up.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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