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After two rough years of inflationary markups, grocery prices should ease in 2009, according to the U.S. Department of Agriculture.

That's a positive note for belt-tightening consumers, who analysts expect to forego restaurants and return to their kitchens as the economy sours further in 2009. The news is not so good for farms and ranches.

In its latest food price outlook, the USDA's Economic Research Service ties flattening grocery prices to significant drops in commodities payouts. Wheat prices hit a historic high in March 2008 but finished the year at nearly half that amount. And meat counter prices for beef were faltering at year's end as consumers filled their grocery carts with cheaper alternatives.

A slower increase in food prices is good news, said Ephraim Leibtag, USDA Economic Research analyst, but it won't erase recent price increases.

"Overall, food prices are still quite a bit higher than they were three years ago, and that's not going to change," Leibtag said.

The high price increases of the past two years will stick for cereals and baked goods, which jumped in price 9 percent or more in 2008. Falling grain prices mean those goods will likely increase in price 3 percent or less in 2009. Eggs, which went from $1.21 per dozen in 2006 to nearly $2 in 2008, should actually decrease in price, but only by a few pennies.

Dairy products, particularly milk, are projected to fall in price after significant markups in 2008. The price for a gallon locally has already fallen, said Bryan Walborn, assistant manager at Evergreen IGA. Overall, Walborn hasn't seen a downward move in prices, which are still being influenced by the midyear markup in fuel as well as commodity costs, which remained high into September.

"Milk is under $4 right now depending on what kind it is," Walborn said. "It was pushing $4.50 a gallon a while ago."

The American Farm Bureau Federation reported Wednesday that whole milk was the only product to drop below its 2007 price in the Federation's 2008 year-end survey of retail food prices. A drop-off in foreign purchases of U.S. milk products coupled with increased production was reportedly behind the lower price.

The federation also noted that retail prices driven up by fuel costs were sticking around despite falling prices at the pump. It noted small price drops for apples, cheese, beef and bacon, but increases of 10 cents or more for cereal and white bread. The cost of a 32-ounce jar of mayonnaise increased 30 cents during the last three months of the year.

As with gasoline prices, which dipped sharply during the last quarter of 2008, food costs are falling partly because the projected demand is dropping off, both in the U.S. and abroad where recession-stricken countries aren't buying as much U.S. food as they had previously. The silver lining behind flattening grocery prices may benefit shoppers, but the economic cloud driving them downward is still gray.

"The good news is that price increases appear to be slowing and there is less expectation in inflation affecting prices," said Scott Rickard, director of the Center for Applied Economic Research at MSU Billings. "The relatively bad news is that this could be because the demand for all goods is declining and will not support attempts to increase prices."

Already, some national chain grocers are working the flattening of food prices into their advertising, said David J. Livingston, a supermarket industry analyst in Wisconsin, who has scouted Montana markets for Western grocery chains. Recession-minded marketing tools are likely to become more common as the year wears on.

"What we've sent this past week are a couple of chains on the East Coast announcing a price freeze on 2,400 items," Livingston said. "That's pretty easy to do when you're not expecting a price increase. So, they're using that to their advantage to make it sound like they're giving the customer a break when it's really just a natural cycle of the economy."

Consumers are becoming more discount-minded, which will create winners and losers in the grocery industry. Specialty shops like natural-food stores with higher-priced organic products are likely to see sales decline. Supermarkets will have to react to bargain hunters turning to big-box stores such as Wal-Mart and Costco for low-priced items, Livingston said.

At Evergreen IGA, the 10-items-for-$10 sales are becoming more popular, Walborn said. Older shoppers, who might normally pass on special offers for kid-targeted brands like Chef Boyardee, are suddenly cashing in - and they're not buying for grandchildren. The store is also stocked well with private labels, or store brands, that offer value pricing for consumers stretching a dollar. Market analysts say consumers will be moving toward those brands and away from the "lifestyle" products like upscale natural or organic items.

Livingston, who last scouted Montana for Washington-based Rosauers Supermarkets, said grocery market expansion into new markets appears to be over for now. Rosauers added an upscale supermarket to Bozeman's list of seven different grocers in late 2007. The industry is now in hunker-down mode.

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