The Shopping Cart Economist

For those that haven’t been followed this blog, I’m not a real economist. I just play one on the internet However, I do read a wide variety of publications and I see common threads between them, but the problem is, no one has woven them together to see a pattern.

I would have done my grocery price predictions for 2009 last month, but really, I’ve needed some time to mash together a handful of independent conversations to come up with what I think food prices are going to do. So before I make my predictions, let me string these problems together and paint a picture for you.

Problem #1 - Water shortages in California will diminish crop yield and livestock outputs. It takes lots of water to grow produce and raise livestock. California farmers are facing a water shortage that’s in its third year according to the California Department of Water Resources. That means that if water’s not as easily available as it once was, California, as the nation’s largest agriculture state, is going to have a rough growing season and therefore, smaller quantities available for market.

Problem #2 - Cost of agriculture inputs (fertilizer, land, feed, etc.) cost more than the current commodity prices are going to yield growers. If a farmer is upside down in their farm assets and it costs more to grow or raise the products than will be fetched at the market, odds are high that farmers will hold back this year and take less risk. Strike two for less outputs into the market.

Problem #3 - Farmer’s access to credit is shot. Most farmers leverage debt to finance the season, and pay the debt back at the end of the season. Especially with the cost of inputs being out of whack, many farmers are struggling to finance this season which means they’ll be farming less than in previous years. Again, the finished goods into the market are going to be diminished.

Problem #4 - The average age of a farmer in the US is over 60-years old. We’re not doing a good job as a country raising up new farmers behind the old ones and the cost of entry into the industry is nearly cost-prohibitive. With farmers beginning to retire and no one to fill their place, we’ll see more farm land being resold and converted for other use besides agriculture.

Problem #5 - There’s a train wreck coming in our food supply. We’ve seen it most recently with the Peanut Corporation of America. The government’s immediate response will be reform. While that is certainly a good and welcome thing, knowing our government, anything they come up with will be a knee-jerk reaction that will cause compliant manufacturers who do take care hassle and headaches getting their goods to the grocery stores. That will increase the costs on the store shelf.

So, what does it all mean? Right now, we’ve seen a decrease in some goods because the commodity prices have fallen. But looking towards the end of the year, if this perfect storm comes to fruition, then we’re going to see food prices even higher than we saw them in 2008. The problems outlined above both decrease the amount of goods in the system, and increase the cost of the goods that do make it to market. That means overall prices will jump through the roof.

At this point, I’m going to hang off from looking at individual commodity prices because I want to watch this a little longer. But if I had to offer a bit of advice now, I’d say stock up on the things your family eats before the prices jump back up; plan for your own garden (or container produce); and hunker down for the storm.