Pick up a newspaper, flip on the TV or radio, or simply visit with neighbors and you'll find that the U.S. economy is a topic of angst, and it will likely get worse.
While agriculture is a bit more recession proof than many industries (because people have to eat), that doesn't mean that prices will align with profit. The abundant supplies across the various protein sectors will prevent prices from gaining much ground. Meanwhile, input prices weigh heavily. Some food companies have talked about passing costs on to consumers, but it may not be that simple this time around.
Pablo Zuanic, JPMorgan food analyst, considered USDA forecasts with commodities' futures prices and estimates that grain prices are projected to rise by 78 percent this year; energy costs could increase by 58 percent.
Looking at specific crops, he says wheat prices could jump by 98 percent, soybeans by 78 percent and corn by 59 percent. He emphasizes that the corn estimate is over the inflated prices already seen in 2007, when corn prices rose 51 percent and soybeans by 42 percent.
As for forecasting 2008 variable cost inflation (raw materials, energy and packaging), Zuanic nearly doubled his projection to 47 percent beyond 2007 levels for a typical food company. When he did those same calculations in January, he forecast a 24 percent inflation rate.
Passing those cost increases on to consumers could be difficult given the state of the overall economy, Zuanic warns. "While all large-cap food companies have announced price hikes, those with consistent investment in innovation and brand building are in better shape to make those hikes stick," he adds.
The American Feed Industry Association predicts that consumer food prices will rise another 10 percent to 12 percent this year, as the weak dollar, reduced global grain stocks, increased global animal protein demand, ethanol grain demand, high crude-oil costs and increased agricultural commodities speculation create the perfect storm.