Higher Food Prices: Why a Russian Heatwave Could Burn Your Budget

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Supermarket checkoutCentral Russia is having the hottest summer on record -- this may not be of major interest in Chicago or L.A., which have their own heat problems to worry about. But we live in a globalized world, and Russia's high temperatures, complete with raging wildfires, are going to send food prices higher for American consumers in the next few months.

According to reports out of Moscow, the Russian Farmers Union says the wheat crop will be down by an estimated 50% this year. That has sent wheat prices soaring from $5 to $7.25 a bushel on the commodity futures market Wednesday, a 45% jump.

Ephraim Leibtag, an economist with the U.S. Agriculture Department's economic research service, says the "pass-through" rate of commodity prices is about 5% to 15% at the retail level.

With a 45% increase in wheat prices, Leibtag expects the cost of wheat-based products like bread, pasta, and flour to rise about 2% to 4% in grocery stores. Consumer goods like breakfast cereal probably won't rise as fast because they contain sugar and ingredients other than wheat.

Paying More for a Caffeine Jolt

And it's not just wheat prices that are going up, either.

J.M. Smucker (SJM), which distributes Folgers and such other coffee brands as Dunkin' Donuts and Millstone, announced on Tuesday that it's raising prices 9%, effective immediately. The company had already raised prices by 4% in May.

Wholesale coffee prices hit a 12-year high on Monday after a string of bad harvests in Colombia, the supplier of premium Arabica coffee.

And cocoa, the main ingredient in a host of chocolate confectionary items, hit a 33-year high of $3,092 a ton on July 30, following a sharp fall in production in Ivory Coast, West Africa, where plant diseases have caused the harvest to shrink by 15% in the last five years.

"A lot of the key commodities that go into food products and baked goods are trending upward right now," says Christopher Shanahan, food industry analyst for San Antonio, Texas-based research firm Frost & Sullivan.

"When there's uncertainty in the price of a commodity, processors and retailers will act on that and try to increase prices to either take advantage of the news or put a buffer on in case their material costs go up faster than expected," Shanahan says.

Knock-On Effects

One side effect of the wheat price rise is the possibility it will cause the price of other commodities, like corn and soybeans, to climb too. If that happens, prices for beef, pork and chicken will also probably go up because corn and soybeans are widely used in animal feed.

Corn, which averaged around $3.50 a bushel earlier this year, was trading at $4.15 a bushel on commodities markets Wednesday. Soybeans, which averaged $9.40 to $9.50, were trading at $10.28 a bushel Wednesday.

"If wheat supplies are down, then demand for the other commodities is going to go up," Shanahan says. "Prices of all commodities are impacted by wheat."

Shanahan says the stocks of retail grocery firms probably won't be hit by the cost increases because they pass those hikes along to consumers. But he notes manufacturers could feel the pinch, especially if oil prices continue to rise beyond the $80 a barrel level.




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