Be prepared -- food is going to become more expensive, even if oil prices stabilize.
Agriculture tends to be heavily dependent on energy for fueling tractors and field equipment, as well as having a heavy reliance on petroleum-based fertilizers and herbicides. But what most people don't realize is that even if oil prices level off, food prices are likely to continue to rise.
Here are some reasons food prices will continue to increase.
The number of bees has been dramatically declining over the last few years. In 2006, Colony Collapse Disorder wiped out 30% to 90% of beekeeper hives. The losses continued last year through this year with over 30% of hives being destroyed in both 2007 and 2008.
The exact cause of Colony Collapse Disorder is not known. Since roughly 75% of flowering plants rely on pollination to help them reproduce, bees are an important link in the chain that produces much of the food that we eat. Without bees to pollinate crops, the crops can't bear fruit, causing crop yields to drop. The end result is higher prices in the supermarket for these foods.
A growing number of countries have sharply curbed food exports in order to ensure an adequate supply of food at affordable prices for their country. While this trend is a much bigger problem for poor countries that rely heavily on imported food than the U.S., it also puts pressure on world food prices including those foods being imported to the U.S.
To make matters worse, the hoarding creates the perception of food shortages, which can lead to more hoarding and further increases food prices.
World Demand for Food
There is a growing demand for food around the world with the emergence of a middle class in such places as China, Latin America, Africa and the Middle East. With more disposable income, these people demand more and a greater variety of food. These middle classes will likely continue to increase, placing more pressure on world food prices.
The Lowly Dollar
The dollar has fallen against other world currencies over the past year. When the dollar goes down in value against other currencies, any dollar-denominated commodity tends to go up in price.
Part of the huge increase in oil prices can be attributed to the fall of the value of the dollar against other currencies. In the same way, most major food commodities are traded in dollars, which makes foreign-produced food more expensive.
Hidden Price Increases
Normally, food manufacturers would be hard-pressed to increase food prices further if they had already raised prices with their increased costs from oil. There is always fear among food manufacturers when they must raise prices that doing so will cause a decline in the amount they can sell. One way around this that manufacturers have been using is that instead of raising the price marked on the product, they simply place less into the package. Many people don't notice the change so they don't lose as much in sales.
Having done this, food manufacturers still have room to raise the actual prices where they would have been much more reluctant to do so if they had previously raised prices the same way.
Recent flooding in the Midwest and Corn Belt has prevented farmers from planting soybeans and damaged the corn crop, which had recently been planted. Analysts have estimated that there may be a shortfall of 15% or more in grain produced this year compared to last year due to the flooding.
The bad weather hasn't been limited to the U.S. Poor weather has reduced overall global food production from Canada, the European Union and Eastern Europe over the last couple of years. A drought has resulted in a major Australian wheat decline. This has tightened world food stocks, which has contributed to rising food prices.
Speculation's role in increased food prices is hotly debated, but it appears that investors have taken an interest in food prices and are playing a larger role in the commodity markets.
As food supplies tighten, there is a good chance that speculators will increase in the hope of making a quick buck, further increasing food prices.
With the rise of oil prices, U.S. ethanol production has greatly increased. It's expected that over 30% of the U.S. corn crop will go toward ethanol production this year.
With such a large portion of the corn crop going to ethanol production, there will be increased competition for the food in other uses, such as feed for cattle and dairy cows, manufactured foods like cereals and foods sweetened with corn syrup.
All indications are that food will get more expensive and you should be preparing for these coming increases. While cutting food prices isn't necessarily difficult, it does take practice and time to learn to take advantage of the money saving tricks out there.