Farm Prices Surge; Rise for Groceries Less Sharp
The fierce drought in the nation’s grain belt pushed up farm prices a steep 4.2% in June, the Labor Department reported Friday, and the price of some farm products leaped as much as 25%.
But prices for finished food goods ready for retail sale rose a more manageable 1.1%, and a drop in energy prices held overall wholesale price inflation for the month to 0.4%, after a 0.5% increase in May, and slightly less than the average for the previous three months.
Economists predicted that June’s sharp increase in farm prices would be diluted along the way to the supermarket as farm products are shipped and processed. “I’m not panicked,” said Michael Penzer, senior economist at Bank of America in San Francisco.
June’s 1.1% increase in the wholesale price of food ready for retail sale was for the most part offset by a 1.6% drop in energy prices. Inflation for all other finished goods during the month was 0.3%.
By contrast, rising food prices more than offset reductions at the first level in the production cycle--production of raw goods. Contributing to the 4.2% jump in the price of unprocessed farm prices were leaps of 25.3% for wheat, 24.3% for corn, 22.8% for turkeys, 22.5% for chickens and 22% for soybeans.
The increase in food prices more than offset a decline in all other raw material prices, including energy goods, manufacturing supplies and construction materials, and the overall increase in the cost of raw goods was 1.3%.
Even the leap in farm prices, however, is not likely to affect the prices that consumers actually pay before next winter, analysts said. And at the consumer level, price increases will be nothing like the 25% rise in the cost of some farm products.
Wheat accounts for only a fraction of the cost of a loaf of bread, for example, and economists said that June’s leap in food prices would translate several months from now into much smaller increases in consumer prices.
David A. Levine, an economist at Sanford C. Bernstein & Co. in New York, said that farm prices account for slightly less than 25% of consumer food expenditures by the time the goods are in the grocery store. And because food accounts for just 16% of the consumer price index, Levine calculated that even a 25% annual increase in all farm prices would add 1 percentage point over the course of a year to the consumer price index.
Even that will not occur until farm goods produced in June make their way to supermarket shelves.
Impact Seen Months Away
“We won’t see much of the drought impact on consumer prices until the end of the year or maybe early 1989,” said David Wyss of Data Resources Inc., a Lexington, Mass., forecasting firm. “The main reason is that we don’t eat many soybeans or grains of wheat or oats. We eat the things that eat soybeans and grain--beef and pork, mainly--and those prices are likely to come down.”
The reason for that seeming paradox, explained price specialist Stacy Kottman of the Georgia State University forecasting project in Atlanta, is that cattle and pig growers, faced with feed shortages, will slaughter herds early, causing a temporary oversupply and downward pressure on prices.
Thus cattle prices declined 5.2% in June and hog prices fell 4%, even though poultry prices shot upward.
Months from now, all this will show up in the supermarket in the form of lower meat prices and higher prices for bread, cereal and beer.
Predicts Hike of Dime a Loaf
Wyss predicted: “We’ll see higher bread and beer prices, by perhaps a dime for a loaf and a dollar for a case. But beef and pork will be cheaper, while poultry will be more expensive. Chickens don’t like hot weather.”
Kottman noted that General Mills recently had increased the prices of some cereal products by 5% in anticipation of farm price increases caused by the drought. And he warned that beef and pork retailers, anticipating that higher prices from short supply inevitably would follow the temporary price increases caused by “stress slaughtering” during the drought, would probably not cut meat prices much at the retail level.
On the whole, economists predicted, wholesale price inflation is likely to continue at the present rate of about 5% a year for the next few months as food prices continue to push upward, energy prices continue to weaken and all other prices creep upward slowly.
Suggests Rise in Inflation
Penzer noted that overall wholesale prices have been rising at an annual rate of 5.2% over the last four months, suggesting an accelerating rate of inflation. For the previous six months, wholesale prices had held steady.
But with volatile food and energy prices removed from the equation, Penzer said, wholesale prices have been rising steadily over the entire 10-month period at an annual rate of 3.2%, a manageable underlying rate of inflation.
Before seasonal adjustment, the producer price index rose by 0.4 points to 107.9 in June, from a base of 100 in 1982. The index for crude goods, which had been declining until the last few months, rose 1.1 points to 98.2. That means that a basket of finished goods costing $100 wholesale would have cost $107.90 in June, while the crude goods that cost $100 in 1982 would have cost $98.20 in June.
