Rising Corn Prices and Your Grocery Bill

By Jack Hough SmartMoney.com / July 18, 2012

Corn prices are nearing the record highs of last summer as the U.S. Midwest suffers its worst drought since 1956. Shoppers should expect higher grocery bills, because corn is used in threequarters of supermarket products. But dont panic. Overall cost hikes are likely to be modest. A 50% increase in the price of corn tends to raise total shopping bills by about 1%, says Ricky Volpe, a research economist with the U.S. Department of Agriculture. Corns price has jumped 45% this summer. Of course, even a modest increase to shopping bills is unwelcome news for households on tight budgets. Strange as it may seem, farm crops arent nearly the largest component of food prices. In 2008, just 15.8 cents of each dollar shoppers spent on food went to farms, according to the USDA. The rest paid for labor, packaging, transportation, advertising and more. Broken down by industry, food processors, which turn crops into things like cereals, sweets and oils, capture nearly twice as much of consumers food spending as farmers, and foodservice companies, more than three times as much. The effect of rising corn prices will vary sharply by food, however, based largely on the amount of processing involved. Farms collect just 7% of the retail price of cereal and baked goods, but 14% of ice cream, 37% of butter, and 46% of whole milk. They collect 51% of retail beef prices and 34% of pork. For affected foods, prices should start to rise in about two months, says Mr. Volpe. The first items to be hit will be dairy and eggs, because of the relatively short time between when cows and chickens consume corn feed and those products go to market. Next will be meats, in order of animal size, starting with chicken and leading to beef. How high might prices climb? The USDA issues food price forecasts on the 25th of each month. The June forecast (issued when corn was just under $6 a bushel, versus close to $7.80 now) called for price increases of 2.5% to 3.5% this year for food eaten at home, versus a 4.8% last year and a 2.8% yearly increase, on average, over the past two decades. The 2012 forecast includes 4% to 5% increases for beef, 1% to 2% for eggs and 2% to 3% for dairy. The July 25 forecast will be more telling, because it will take greater account of higher corn prices. It will also reflect a change in the direction of energy prices. U.S. crude oil hit a ninemonth low of $77.28 a barrel on June 28, but has since climbed 14%. Energy makes up 3.5 cents of each dollar shoppers spend on food.