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Plan Well, Retire Well

Saving and investing your money

Global Food Economy and Your Food Bill

Have you noticed your grocery bill increasing? In February 2011, food prices increased 3.9% over prices in January , and food prices continued to increase in March with the eighth straight monthly increase. Overall, world food prices have reached a record high this year. OUCH! Rising food costs are pinching our already tight budgets.

Why are food prices going up? Economists seem to agree that it is a combination of factors.

1) As populations grow worldwide, there is more demand for food. And, as countries develop, there is a tendency for people to want to eat more meat. For example, urban Chinese increased their consumption of chicken 219% per capita from 1983 to 2006. It takes more resources to produce meat calories than grain calories – something to think about the next time you order a roast beef sandwich versus a humus wrap.

2) Typically when the price of a commodity – like corn – goes up, the demand goes down. However, the current high demand for biofuels keeps demand and prices high.

3) Worldwide we have less stockpiles of food. When disasters affect food supplies we see prices increase.

4) Unusual weather patterns worldwide have affected these food supplies. We have seen floods in Australia and droughts in China and Russia. The droughts last summer started the crop price increase. Global wheat prices more than doubled during the second half of 2010. Unusual winter freezes this year in Florida, Texas and other southern U.S. states caused a decrease in our supply of fruits and vegetables, and prices to increase.

What does this mean in our neighborhood – and throughout the world?

Prices of staple food items like wheat, corn and sugar have risen by more than 50% in recent months. But our food prices haven't increase that much at all. Why? Food prices in the U.S. are largely driven by other costs (such as labor, marketing, and other overhead costs) rather than the price of the ingredients or commodity. For example, according to food economist Abdolreza Abbassian at UN Food and Agriculture Organization, 2% of the price of a loaf of bread in the US may be the flour price. In developing world countries, it might be 70% of the price.

The World Bank has reported that as many as 44 million more people have been forced into hunger because of the rising costs of food. This is fueling conflicts in Libya, Tunisia, and Egypt. Time magazine has a very cool image showing how much people pay (as a percent of their income) for food in different counties. Take a look and see if you notice any correlation between the countries in purple (those spending over 36% of household consumption on food) and headlines in the news.

People in the U.S. also feel the impact of food price increases. A study reported in the Chicago Fed Letter, found that those the hardest hit with food price increases are people in the bottom income quartile and food stamp recipients. People with low-incomes eat more food at home and less in restaurants, compared to other income groups. The food item cost affects the price of food more at grocery stores than at restaurants.

I think it's amazing how global changes become important when I'm shopping for food in my hometown grocery store. Stay tuned to future blogs about tips on how we can manage the increases in food prices, and keep our grocery bills manageable.

If you have tips to share, click on my name below and send them to me please. I will include them in future blogs.

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