I do all the grocery shopping in our house, mostly because I like it but also because it’s a continual challenge to get the best food value for your money. It’s also where kitchen table economics meets the world of commodity markets, and being an avid follower of commodity markets I like the real world exposure that the grocery store provides on this front.
Grocery store chains are hopping mad right now about producer prices going up in spite of a collapse in many commodity prices, such as milk, grain, and corn. I’ve noticed this on my trips down the grocery aisle, for example the price of milk has gone up dramatically despite a significant collapse in the price of its only ingredient – milk.
“It’s disingenuous to consumers that all commodity costs are coming down, interest rates are coming down, everything is coming down, and [the national brands] are taking their prices up,” Steven Burd, chief executive of Vons owner Safeway Inc., told investors Thursday.
Jeff Noddle, chief executive of Supervalu Inc., described the conflict as “kind of a battleground with manufacturers right now. We are pressing for a reduction in prices.”
The costs of the raw goods that go into almost every food product have fallen by substantial amounts, said Jonathan Feeney, an analyst at Janney Montgomery Scott in Philadelphia.
The dropping price of grains “has widespread impact across food. Not only are corn, soybeans and wheat key ingredients in products up and down the snack, cereal, soup, bakery and other aisles, but they also serve as key inputs in commodity protein and dairy production,” he wrote in a recent report to investors.
Unilever called the situation “complex,” with pricing levels remaining “both volatile and unpredictable in the medium to long term.”
[From Grocers, name-brand food producers at odds over prices - Los Angeles Times]
Unilever calls the situation “complex” when in fact it is really simple to explain. Food producers are basing their product pricing not on the market pricing for commodities but on the futures contracts they have locked themselves into. Farmers aren’t getting the extra $$, traders and middlemen are and producers are passing on the costs of their bad decisions to consumers, who not surprisingly are spending less and hurting retailers in the process.
In the absence of strong competitive forces and because all of the big manufacturers are locked into the same futures contracts, well it translates into very little market based pricing because who wants to lose money just to boost market share? As reflected here is the peril of being a large grocery retailer like Safeway, which depends on reliable high volume supply chains that don’t mate well with local suppliers… but maybe that is the answer.
I don’t begrudge futures traders for taking on risk in exchange for financial return but I do hold manufacturers and suppliers responsible for predatory pricing that takes every opportunity to raise prices in response to spot market movements but is highly latent when spot markets decline and they are locked into future delivery contracts.
No market better illustrates this point than gasoline, which never misses an opportunity to push prices up when spot markets gain yet not so surprisingly is slow to lower prices when spot markets decline, often explaining this phenomena with their two favorite excuses: 1) spot markets don’t reflect our landed costs, and 2) supply problems with refiners because the commodity price is but one factor in end product pricing.