Food Inflation to Quicken as Nestle, McDonald’s Lift Prices

U.S. food-price inflation may top the government’s forecast as higher crop, meat, dairy and energy costs lead companies including Nestle SA, McDonald’s Corp. (MCD) and Whole Foods Market Inc. (WFMI) to boost prices.

Retail-food prices will jump more than the U.S. Department of Agriculture’s estimate of 3 percent to 4 percent this year, said Chad E. Hart, an economist at Iowa State University in Ames. Companies will pass along more of their higher costs through year-end, said Bill Lapp, a former ConAgra Foods Inc. chief economist.

Groceries and restaurant meals rose 2.4 percent in the four months through April, the most to start a year since 1990, government data show. During the period, rice, wheat and milk futures touched the highest levels since 2008, and retail beef reached a record. Yesterday, J.M. Smucker Co. announced an 11 percent price increase for Folgers coffee, the best-selling U.S. brand, after the cost of beans almost doubled in a year.

“It’s going to be a tough year” for U.S. shoppers, said Lapp, who is president of Advanced Economic Solutions, an agriculture consultant in Omaha, Nebraska. “You’re looking at an economy where a lot of consumers are under some serious pressure from food and fuel costs.”

Even after a drop in commodities this month, seven of eight tracked by the Standard & Poor’s GSCI Agriculture Index are higher than a year earlier as adverse weather damages crops, rising demand erodes inventories and a weak dollar boosts demand for U.S. exports. Corn futures are up 98 percent, wheat gained 67 percent, raw sugar advanced 44 percent, and rice jumped 25 percent.

Crop Damage

Dry weather during this year in Europe, China and the southern Great Plains of the U.S. may cut crop yields, while floods along the Mississippi River this month may slow planting of corn, soybeans and rice. The U.S. is the world’s largest agricultural exporter.

The United Nations Food and Agriculture Organization said May 23 that price swings will persist in coming years because of mismatches between supply and demand. The FAO said May 5 that global food costs rose in April for the ninth time in 10 months, near the record reached in February. Signs of inflation have prompted at least two dozen central banks, including in China and Europe, to raise interest rates this year.

Higher wholesale costs over the past two years are still working their way through the supply chain, and companies including foodmakers and grocers are showing more willingness to pass along the increases to consumers, said Hart, the Iowa State agricultural economist.

Delayed Retail Increases

Surging prices for corn, used mostly as livestock feed, have contributed to the rally in wholesale beef and pork costs during the past year, as livestock producers limited herd expansion to limit expenses on feed.

“The biggest impact is six to 12 months out” for meat prices, Hart said.

Whole Foods, based in Austin, Texas, and the largest U.S. natural-goods grocer, said vendors have increased food prices this year. “Right now, we’re able to pass it all on,” Co-Chief Executive Officer Walter Robb said May 4 in a telephone interview.

McDonald’s, Cracker Barrel

Oak Brook, Illinois-based McDonald’s, the world’s biggest restaurant chain, raised U.S. menu prices 1 percent in March to help offset higher commodity costs, Chief Financial Officer Peter Bensen said during an April 21 conference call. The company expects food expenses to increase as much as 4.5 percent in the U.S. and Europe this year.

Double-digit gains in pork, butter, coffee and lettuce costs during the three months ended April 29 led Lebanon, Tennessee-based Cracker Barrel Old Country Store Inc. to raise restaurant menu prices by 1.5 percent in March. Commodity inflation has been “above our expectations,” Chief Executive Officer Michael Woodhouse said yesterday on a conference call.

A prolonged economic slowdown would curb demand and may halt further price increases, said Lapp, the former ConAgra economist. Unlike in 2008, when food rose at the fastest pace in 28 years, consumers are quick to seek cheaper alternatives, he said.

‘Alarming’ Increases

Some of the retail-food increases, including meats, fruits and vegetables, are “alarming,” he said. “The consumer’s ability to absorb higher prices isn’t as robust at this point,” and companies may be less willing to charge more because they don’t want to forfeit market share, he said.

Paul Bulcke, the chief executive officer of Vevey, Switzerland-based Nestle, the world’s largest food company, said May 19 that food-price increases should be gradual and that companies would try to absorb commodity expenses by reducing costs in other areas.

Earlier this month, San Diego-based Jack in the Box Inc., a fast-food chain with restaurants mainly in the western U.S., raised its prices 1.5 percent, saying it was being cautious about increases because of the competitive environment. BJ’s Wholesale Club, a discount grocery retailer based in Westborough, Massachusetts, said May 18 that consumers were trading down to less-expensive brands.

The USDA, which bases its forecast on price gains that have already occurred and projections of how increases will play out over the rest of the year, tends to be conservative in its estimates, according to Iowa State’s Hart.

New USDA Forecast

The department issued its latest monthly projection for 2011 food inflation today, leaving its estimate unchanged at 3 percent to 4 percent. Dairy products was the only category that was revised, with prices now estimated to climb 5 percent to 6 percent, up from 4.5 percent to 5 percent.

The USDA last raised its forecast in February. Since then, adverse weather has limited prospects for crop supplies more than the government expected, and crude oil is up 42 percent from a year earlier, putting more pressure on agricultural prices, Hart said.

Food prices measured by the Bureau of Labor Statistics rose 0.3 percent in April, bringing this year’s gain to the highest since a 3 percent increase in the first four months of 1990.

In the first four months of 2011, meat and fish prices rose 4.3 percent, according to the bureau. Consumers paid about $2.722 for a pound of ground beef, a 14 percent increase, while a fresh whole chicken cost $1.261 a pound, slightly lower than $1.28 at the start of the year.

The price of a pound of field-grown tomatoes last month reached $2.27, the highest since 2004 and up 43 percent from the beginning of the year, the bureau said. Fresh fruit and vegetables, which are more volatile because of weather, fell 1.3 percent in April. They have already risen 3.4 percent this year, according to government data.

To contact the reporters on this story: Alan Bjerga in Washington at abjerga@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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