Natural Foods Merchandiser

Prices high today, forecast mixed

by Jane Hoback

The news is bad: Consumer prices skyrocketed in June at the fastest pace in 26 years. Food prices rose by 0.7 percent, more than double May's 0.3 percent increase, according to the U.S. Department of Labor. Fresh-vegetable prices increased by 6.1 percent, the biggest increase in nearly three years.

But that's not really news to anybody who's pushed a shopping cart through the aisles of a grocery store. Or who's stocked the shelves. Or raised the chickens or milked the cows or planted the wheat.

Blame the double whammy of soaring prices for fuel and commodities. Fuel is fuel. Everybody pays the same, whether organic farmer or conventional. But as the cost of conventional commodities continues to rise, what is the effect on organic soybeans, corn, wheat and hay? Will the gap between prices for conventional goods and organic products narrow?

At this point, it's anybody's guess. Forecasts from economists and analysts are far from unanimous.

"The story is too new," says Steven Blank, extension economist at the University of California, Davis. "Fuel – gasoline and diesel for equipment – has seen a 50 percent increase in the last two years. Commodities have cycles. But this gasoline-based disruption has only been in the last couple of years."

The huge growth in biofuels is having a big effect on commodity corn, soybean and livestock prices. Farmers are planting more corn for ethanol, which is reducing the acreage devoted to soybeans and pushing up the prices of corn and soybeans . For the 2007-08 soybean crop, for example, U.S. farmers planted 64 million acres compared to 72 million to 75 million acres in the previous four years, according to the New Agriculture Network's online newsletter. Wheat is being affected by tight world supplies.

That could help narrow the gap between prices for conventional and organic products—anywhere from 20 percent to 100 percent—especially cereal and livestock products. "The premium (for organic products) could disappear," says Blank. "But it's a very hard forecast for us to make."

Organics prices are rising, too. Fuel costs, rising demand and tight supplies of feed all contribute to the increases.

"The organic corn market is being driven by increased demand for certified organic meat, poultry and dairy products," writes Corinne Alexander in the New Agriculture Network's online newsletter. Add to the mix the devastating effects of the June floods on farmers in the Midwest. Planting was delayed, and in some cases, canceled this year. "The price of organic seed doubled," says Ronnie Cummins, national director of the Finland, Minn.-based Organic Consumers Association. "Prices will continue to rise for everything."

The average price of organic soybeans is about $23 a bushel, according to the New Farm Organic Price Index. It's about $28 a bushel in the Upper Midwest, up from $20 at the beginning of the year, according to the U.S. Department of Agriculture. Organic corn is expected to be anywhere from $12 to $16 a bushel this fall, says Jamie Johnson of Organic Valley Family of Farms in LaFarge, Wisc. "This will translate to a minimum increase of about 30 cents for a gallon of milk, 30 cents on a pound of cheese and 20 cents on a dozen eggs." Organic Valley expects the average price of a half-gallon of organic milk to increase to more than $4 in the coming months. A gallon could top more than $7. And Eggland's Best Organic Eggs cost $4.59 to $4.99, up from between $3.79 and $4.29 last year.

"Increasing commodity costs are having a negative impact to the growth of organic and natural foods," writes food industry expert Rick Shea in a note posted by Seeking Alpha, which compiles content from stock market bloggers and money managers. "As commodities increase, consumers are being more selective and price sensitive.

"Longer term, the positive trend for growth in organic and natural foods will continue," he adds.

Blank, of UC Davis, emphasizes that it's too soon to tell what consumers of organics will do. "What is going to be the level of the lake? There may not be any significant changes in discounts and premiums. The average price level will rise because of fuel."

A big question, Blank says, and one that's not easily measured, is: "How loyal are consumers to organic products?"

Jane Hoback is a Denver-based freelance writer and editor.

Natural Foods Merchandiser volume XXVIII/number 9/p. 16

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