Sticking it to Consumers and Farmers

November 7, 2008

WASHINGTON (Nov 7, 2008)—If you’re miffed about grocery prices still being high despite price drops in fuel and agricultural commodities, you’re in good company.

Sen. Chuck Grassley (R-IA) recently penned a letter to the Grocery Manufacturers of America (GMA) demanding one of two things: cheaper food on the shelves or an apology for unfairly blaming ethanol and grain producers for higher retail food prices.

Listen to former House Ag Committee Chairman Larry Combest talk about food prices this Thanksgiving.

“Now that grain and energy prices have been sliced in half, surely we can expect that the grocery manufacturers will pass on these savings to American consumers who are suffering from economic hardship,” the Senator mused.

Grassley likely will get neither an apology nor cheaper groceries anytime soon. This profit margin padding has been the plan for some time.

In December 2007 the GMA—which represents many multinational food manufacturers—released a study that flippantly stated, “The long period of low food price inflation rates prior to 2007 has passed.” In other words, what goes up doesn’t come down.

Curiously, that report was published months before the peaks of fuel and commodity prices in the spring and summer. But when those temporarily high fuel and crop prices arrived, food manufacturers had their scapegoat, and they launched an aggressive smear campaign against America’s farmers focusing on renewable fuels production.

Though the GMA report predicted commodity prices would reach a new plateau, oil has now fallen 50 percent to $65 a barrel, corn has dropped to $3.85 a bushel from nearly $8, and wheat has plunged to $5.29 per bushel from highs in the mid-teens earlier in the year, a 60 percent reduction.

Farmers, still faced with soaring input costs, are starting to feel real financial pain.

However, the opposite is true for GMA’s members. A box of Wheaties and a loaf of bread are still as expensive as when price hikes took hold because food companies are pocketing the profit instead of passing their savings along to grocery shoppers.

And America’s leading economists expect that trend to continue. They’ve termed this phenomenon “sticky prices.”

Dr. Randall Parker of East Carolina University explained in a recent interview, “Sticky prices are prices that don’t go down as fast as they go up. So economists would say there is an asymmetry—they go up very rapidly but don’t go down with same rapidity as what they went up.”

Lars Perner of the University of Southern California says the only thing that will un-stick these sticky prices is an industry-wide price war triggered by competitors trying to lure customers to a particular brand.

Unfortunately for shoppers, such a war will not start until companies decide that they are willing to take a profit reduction.

Consumers do have one thing going for them, though. Powerful legislators like Grassley are furious about food manufacturers’ recent actions and will hold their feet to the fire.

Congressman Collin Peterson (D-MN), the Chairman of the House Agriculture Committee, recently told a group of farmers: “I agree with Senator Chuck Grassley, who has told (the food processors and grocery companies) to lower their prices, or apologize. Or there’ll be hell to pay.”