(KFT) Soaring Food Prices: Worst Yet to Come

Over the past few months, consumers in America are witnessing higher prices for their daily food items. The concern is that this inflationary situation may only get worse in the days to come.

The Department of Labor Statistics stated that the producer price index soared by 1.6% in February 2011, following a 0.8% increase in January this year. However, economists expected the producer price index to grow marginally by 0.7 %.

The Producer Price Index (PPI) measures average changes in prices received by domestic producers for their output. It provides information on price developments from producer and is capable of providing future picture of inflation, since these prices in some cases tend to be passed on to consumers.

The US Department of Agriculture expects the average price of food in 2011 to be 4% higher than the previous year. According to some private forecasters, the month of December could see prices increase by as much as 6% over December 2010.

Food prices surged 3.9% in February this year, primarily attributable to the strong winter in some of the highly fertile Southern states, such as Florida and Texas .

February was a difficult month even at the wholesale level, recording the highest price increase in 36 years. Vegetables (both fresh and dry), meat and dairy prices drove the 3.9% increase.

Many of the companies, grocery chains and restaurants have increased their prices. Over the past week, companies such as Kraft Foods Co. (KFT) and J.M. Smucker Co. (SJM) have increased prices for their packed coffees that are sold at grocery stores. Starbucks Corp. (SBUX) also joined its competitors by increasing prices for its bagged coffee.

Moreover, food companies are not the only ones affected. The restaurant industry has also been hard-hit. In 2010, many restaurant chains such as Uno Chicago Grill Pizza, Charlie Brown’s Steakhouse to name a few, went bankrupt and economists do not expect the situation to improve in 2011.

Even the giants of the restaurant industry, such as McDonald’s Corp. (MCD) and Yum! Brands (YUM) are affected by the soaring prices. However, since these companies are financially stronger, they are able to absorb costs while transferring the impact to consumers through price increases.

Globally, prices of all major raw materials, such as corn, wheat, soybeans, coffee and other commodities have been increasing significantly over the past year. Since these commodities are the raw materials in almost all food and beverages, they have had a direct impact on food prices. Added to this, after the tragic earthquake and tsunami in Japan, corn prices of corn have escalated.

The revival in the consumer traffic just before Thanksgiving raised hopes of a recovery, but given the difficult market, it looks like the recessionary trends are far from over. Furthermore, with more expensive food, people will have less disposable income (which is ideally used for casual spending which in turn helps the economy grow and create jobs).

KRAFT FOODS INC (KFT): Free Stock Analysis Report

MCDONALDS CORP (MCD): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

SMUCKER JM (SJM): Free Stock Analysis Report

YUM! BRANDS INC (YUM): Free Stock Analysis Report

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