Growing expense: Weather and fuel costs driving up food prices

If you notice your grocery bill inching higher as 2011 continues,

blame a confluence of global forces that is driving food prices up.

Industry experts cite many reasons for the higher grocery bills, including
rising oil and gasoline prices; growing demand for food in China and India; poor
grain harvests in Russia; frost damage to crops in Florida and Texas; floods in
India, Pakistan and Australia; rising fertilizer and seed costs for farmers; and
the smallest cattle herds in the U.S. in decades.

"There are a lot of things that are affecting prices now," said Tommy Langford,
director of purchasing at Ellwood Thompson's Local Market in Richmond.

Weather in certain parts of the world is causing prices to go up, but a major
factor right now is fuel costs, Langford said. Rising gasoline and diesel prices
have led some food distributors to add fuel surcharges to shipping costs.

Grocers and restaurants must absorb those costs or pass them on to consumers.

"Our price on diesel fuel has gone up 65 cents per gallon since Jan. 1," said
Elvin Smythers, president and CEO of Merchants Grocery Co., a Culpeper-based
company that distributes food products to grocery and convenience stores,
restaurants and schools in Virginia.

"That is having an impact around the industry on our cost of doing business," he
said.

Smythers said the company has tried to absorb some of the gasoline increase
itself while passing on a portion to its customers as a fuel surcharge.

"It does look like we are in a period of food costs spiraling upwards," he said.

In February, food prices rose 3.9 percent, the most month-over-month increase
since November 1974, largely because of winter freezes in Florida, Texas and
other Southern states that damaged produce crops, according to the Labor
Department.

The USDA reported in March that it expects food prices to increase 3 to 4
percent in 2011, compared with last year. That includes food at grocery stores
and restaurants.

"Although food price inflation was relatively weak for most of 2009 and 2010,
higher food commodity and energy prices have recently exerted pressure on
wholesale and retail food prices," the agency reported. "These cost pressures,
along with strengthening global food demand, have pushed inflation projections
upward for 2011."

The cost of groceries in the Richmond area included in the Virginia Department
of Agriculture's monthly Market Basket report rose about 5 percent in March,
compared with the same month in 2010. However, prices were down about 4 percent
overall in March when compared to February.

The Market Basket report includes 40 items priced during the same period each
month at selected stores in the area. Items include such staples as bread, milk,
potatoes and flour.

However, prices are not uniformly up. The retail costs for about 16 of the 40
items were down in March, compared with the same month in 2010.

A major factor behind food prices will be the soaring prices of traded
commodities such as wheat and corn. Commodities markets rose in 2010 on expectations of weak crops in major
grain-producing parts of the world, and rising demand in China and India, where
a growing middle class is seeking a more Western-style diet.

The higher prices for commodities then trickle down into feed costs for
livestock. The USDA expects beef prices to increase 3.5 to 4.5 percent in 2011,
while pork prices are expected to jump 5.5 to 6.5 percent. The agency projected
prices for retail dairy products would increase 4.5 to 5.5 percent in 2011.

Higher wheat commodity costs also are expected to cause cereal and bakery
product prices to rise 3.5 to 4.5 percent overall in 2011, the USDA said.

Although U.S. consumers will feel the impact, it won't be as severe as in the
developing world, where higher food costs have already led to hunger and social
unrest.

The World Bank warned last month that 44 million people worldwide were in danger
of extreme poverty and hunger because of higher costs for such staples as wheat
and rice. The agency said its food price index rose 15 percent from October to
January and is just 3 percent below its 2008 peak.

Higher food costs have less impact in developed nations such as the U.S., where
consumers may spend 15 percent of their income on food. In contrast, families in the developing world may spend more than 50 percent of their income on food, so small changes in prices make a big difference, said
Jonah Bowles, a market analyst for the Virginia Farm Bureau Federation.

"When you double those prices, you truly double the cost of food to many of the
underprivileged countries," Bowles said. "If the price of rice increases by 100
percent, for those who live and eat rice as a staple, their increased food cost
is tremendous."

Shipping costs can hit especially hard on products that are imported.

The USDA reported that banana prices were up 2.5 percent in January, compared
with early 2010, while overall citrus fruit prices were up 10.6 percent.

That's something that Langford at Ellwood Thompson's has noticed. Price
increases, "mostly hit us in produce, and the things we don't grow here in the
United States, like bananas," he said.

"We're fortunate that we buy a lot (of products) from local vendors, so that
makes it easier on us," he said.

Langford said fuel prices not only affect the cost of shipping food but also the
cost for such items as plastic packaging to wrap foods. Although commodity prices have been high, farmers aren't necessarily reaping riches, industry observers say.

"Most of their (farmers') input costs have gone up," said Steve Patterson,
marketing director for Southern States Cooperative, a Henrico County-based
farmers cooperative that operates about 1,200 retail outlets in 23 states.

"Fertilizer prices have gone up. Seed prices have gone up. Fuel prices are much
higher."

"There is price pressure across the board both on the input side and on the
prices when (farmers) sell crops," Patterson said. "It may show up in higher
prices at the grocery store."