Bill Lapp sees food inflation enduring

by Josh Sosland
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OMAHA — Food price inflation at the consumer level will average 7.6% in 2008-2012, said Bill Lapp, principal, Advanced Economic Solutions, Omaha. Increased global demand for food and a sharp increase in the use of corn for ethanol production will drive the prices strength, Mr. Lapp said in a new A.E.S. study. Citing data from the Bureau of Labor Statistics, U.S. Department of Labor, Mr. Lapp said 2007 food inflation would be 5.4%, a figure more than double the 2002-06 five-year average food inflation of 2.4%. The higher inflation in 2007 and projected for the next several years "represents a sharp departure from largely benign food price inflation over the last 25 years."

Mr. Lapp, who was the chief economist at ConAgra Foods, Inc. for many years, said "the price of commodities such as corn, wheat, soybean oil and milk have already begun to move to a new plateau."

While the weak U.S. dollar and global economic growth have contributed to the commodity price surge, Mr. Lapp described as the "primary catalyst" the expansion in ethanol production.

Corn utilization for ethanol production has doubled in the past two years and currently accounts for a quarter of all U.S. corn use. Prospects for further growth in corn demand for ethanol is likely to leave corn futures above historical averages in the years ahead. This strength, in turn, will "directly impact nearly all other food input prices," Mr. Lapp said. As a result, he predicted wheat prices averaging $6.50 a bu over the next five years, soybeans at $10 and rice and $10 per cwt.

"For dairy, protein, and egg markets, the price patterns are expected to be responsive to the higher feed costs, but the timing and extent of producers’ response to higher feed costs is less clear," he said. "The longer cycles of expansion and contraction for dairy, protein, and egg producers will likely create more volatility in producers’ margins, but ultimately prices will move higher to compensate for increases in feed costs. This includes significant increases in prices (versus 2002-06) for pork (+69%), chicken (+64%), eggs (+58%), milk (+43%) and beef (+43%).

Mr. Lapp was quick to caution that weather will be a major driver in agricultural markets, offering the potential for extraordinary price surges in the case of crop failures. He said yields for major crops have been 10% or more beneath trend-line yields in about one year in four.

"With U.S. and world stocks already at minimal levels, such an event would have a dramatic impact on commodity prices and ultimately on consumer food prices," he said. "While it is hard to predict the impact of weather events, it is likely that the end result would be consumer food inflation rates of close to 10% for one or more years."

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