Trip to the Grocery Store Costs You More

As if Americans haven’t noticed, their trip to the grocery store over the past couple of years has cost them more. How much more? Between 12-20% depending on what you purchase.

Why?

There are a few reasons, and a few insights.

1. Worldwide, many economies that for years were stuck in the doldrums are starting to emerge. Brazil, China and India have massive populations that are transitioning from being dirt poor and eating what they could scavenge to populations that are becoming more middle class. As a nation gets wealthier, its diet changes and demand for better grades of protein and higher quality foodstuffs increases. For many of these foods, it’s hard to increase supply so prices go up.

2. Loose monetary policy in the US. The weak dollar policy that began under President Bush and accelerated under President Obama has caused the cost of production to increase. This has spilled over into the end cost for food. It is impossible to be critical of each and every policy that the Treasury and Federal Reserve have employed to counteract the financial crisis, but QE2 is one that has been really harmful to the American consumer because it devalued the dollar relative to other currencies in a significant way.
AMEX Dollar Index Stock Chart

AMEX Dollar Index Stock Chart by YCharts

3. Ethanol subsidies have contributed mightily to an increase in the price of grain. This has cycled through, and artificially driven up prices in a lot of different sectors of the economy, food, drug and chemical being the most affected. Ethanol subsidies also tie the price of corn to the price of oil, even though the two markets are unrelated when it comes to supply and demand. When oil prices increase, corn rallies.

If we examine meat prices, something else is really interesting to me. The WSJ story I linked to reports that pork prices are up 17%, beef prices are up 14-15%, and bacon prices are up 34%.

Bacon prices are always more volatile than other meat group prices. There is seasonality to bacon, and they have always moved more. But they have moved double, and that isn’t normal.

The reason that I can point to is there is no futures contract for bacon. The Pork Belly contract at the $CME was delisted this year. The contract had no appreciable trading volume or open interest for years. Having no speculative futures contract makes it much more difficult for producers and consumers to diversify and hedge their risk. Having no outlet for risk transfer, they have no choice but to raise prices.

It’s hard to say how much the price for bacon would be up if there were speculation in pork bellies. But I would hypothesize that all things being equal the price would be up much less than 34%.

The next time you hear someone rail against greedy speculators, tell them you’d rather pay lower prices for goods and services than listen to them whine about something they didn’t know anything about.

Which market has a functional futures market where there is speculation and which doesn’t?

thanks for the link Instapundit.

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  • Yet our Nanny-State government never counts food OR fuel in calculating inflation, it might make them look bad at election time. Goes a long way in explaining their >10% approval rate, doesn’t it?

  • For about a year, I’ve been telling friends that, given the dismal low interest rates on savings, the best investment for small savers is to buy what you always eat in bulk when it comes on sale and dine off it, taking care to replenish the supply before it drops so low, you have to replenish at full price.

    Doing that, twenty percent inflation becomes twenty percent interest. And if any crisis, personal or global comes along, you’ve got one of your most important necessities on hand. Unlike gold or stocks, you can eat food. The only way you can lose is if the price of some food commodity plunges in value, and that’s extremely unlikely, given the circumstance Jeffrey Carter mentions above.

    Yes, it only works for food that can be stored and only in the quantities you’re likely to consume in the next year or so, but it is a useful cushion, particularly if you already own a home.

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  • Anonymous

    Last time I checked, vegetables were seasonal but crude oil wasn’t. The price of seasonal vegetables varies wildly due to supply and demand. OPEC regulates supply artificially.

    I’ve heard of comparing apples and oranges, but crude oil and onions takes it one step further.

    • Nonnie_43

      But tying corn prices to crude oil makes sense?

      • it does because of ethanol. Ethanol is seen as a substitute for crude oil…and it’s mandated into gasoline.

        • NUKE ISRAEL and the PRICE of CRUDE will DROP !!!!!

    • there aren’t futures markets for tomatoes, or other legumes.  If there were, the volatility of the price would be lower, that was the point.

  • NON-WHITE LEECHES BREEDING and DEMANDING ARE ONE CAUSE—WHEN YOU USE OTHER PEOPLES MONEY—WHO CARES !!!!!

    REPEAL the 13th AMENDMENT

    REPEAL the CIVIL RIGHTS ACT of 1964
     
    and REPATRIATE ALL NON-WHITES!!!!

    RETURN the COUNTRY to the HUMANS!!!!!

    STOP THE MADNESS!

    • Leaving this up here to show the idiocy of some people.  Earlier I think he wanted to bomb Israel. Yeah, that’ll work.  I am sure there will be no fall out from that…..

  • Anonymous

    I’ve been thinking about this some more.

    #1 That graph is clearly bogus. It shows minimal fluctuation in the price of crude since 2000. Really? Google “graph oil prices” and see what you find. During 2007 alone the price DOUBLED. Now granted that’s not a *monthly* fluctuation, but it’s a hell of a change that somehow is not reflected in that graph.

    #2 What about other products where futures markets exist? Is there volatility in pricing there? Of course there is. In some cases, massively. Google is your friend, but how about this? http://www.mongabay.com/images/commodities/charts/phosphate_rock.html

    #3 How would a futures market in perishable foodstuffs possibly work? There’s a massive glut of product during the growing season, a dearth in winter. That’s why the price varies so much. Crude oil is pumped out of the ground at a near constant rate. OPEC adjusts the pumping rate to match demand, so that prices don’t get too high or too low. And yet the prices still vary remarkably. Now why would that be?

    #4 But let’s leave #3 aside for a moment and assume that it would work. Would it smooth out the variances? Well that’s why futures markets were created – so that businesses could ensure a constant supply of raw materials at a relatively stable price. Would it result in lower prices overall – how could it? Given that every trade has commission charges that’s an additional cost that gets passed on to the consumer.

    • 1.  the graph isn’t bogus. It compares percentage price fluctuations.  Onions are more volatile than oil.

      2.  There is price volatility in everything.  However, when you have an organized futures market, market participants can hedge their risk, smoothing out price fluctuation.  It’s why the Chinese organized a rice futures market in the 12th century, and why in 1848 the CBOT started.

      3.  Perishable food stuffs, you mean like rice, corn, oats, milk, cheese, wheat, barley, pork, beef, soybeans, soybean oil, soybean meal?  Don’t know, someone should start trading that stuff and see what happens.

      4.  Short answer, is yes they do trade perishable items and they do smooth out price fluctuations.

      • Anonymous

        Explain how a futures market in a product that’s both seasonal AND perishable would work.
        Milk, cheese and pork is perisahble, but there’s a fairly constant production rate.
        Grains, oils and legumes can be stored for years without deteriorating.
        Explain how a futures market in fruits and vegetables would work to the customers’ benefit.

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