Are You Totally Cereal? Breakfast Cereal Prices Are Going Up, Portion Sizes Down
In an effort to offset rising input and transportation costs, Kellogg’s has announced plans to reduce the sizes of cereal boxes while simultaneously increasing prices. (the second price increase is in the last 6 months) A Kellogg’s spokesperson said that on average, cereal box sizes are being reduced by 2.4 ounces, which amounts to a “low to mid-single digit” price increase. This news comes after last months Bureau of Labor Statistics report that showed grocery costs had jumped 5.1 percent in 12 months, the latest in a string of increases, and experts are saying that the nation is undergoing its worst grocery inflation since the early 1990s.
The cereal price increase comes despite the May 2008 Food Outlook report by the Food and Agriculture Organization of the United Nations (FAO) that said that in 08/09 world cereal production is forecast to exceed total utilization for the first time in three seasons. The report said that recovery in global stock levels looks promising and world end-of-season cereal stocks for crop years closing in 2009 should increase by 3 percent (or 12.5 million tons) from their 30-year low opening level to 421 million tons.
Chart Source: Food and Agriculture Organization of the United Nations (FAO): Food Outlook May 2008
These significant cereal price increases also come despite the fact that only a small fraction of the cost of retail food is a direct result of farm inputs. For every $1 spent on retail food grocery products in the US, the farm input value is only around $0.19. In a $5 box of corn flakes, there is less than $0.10 worth of corn.
The transportation cost increase makes sense, however I am always surprised when the argument goes against ethanol/biofuels like the Grocery Manufacturers of America did with their recent smear campaign. We should remember that ethanol production puts more fuel on the market, which lowers fuel prices. This is one of the few positive things we are doing to proactively lower/control gas prices and improve transportation costs. (Don’t believe me? Try taking the 9 billion gallons of ethanol we are creating this year off the market; then see what gas prices would be.)
One more thing about food companies and the things they are up to. -The Associated Press reported that General Mills spent $160,000 in Q1 lobbying Washington against the farm bill and other food safety legislation. The Grocery Manufacturers of America, of which General Mills is a member, sided with President Bush when he vetoed the 2008 farm bill. (which was later overwhelmingly rejected by the House)
So what’s going on here?
Despite projected increased stocks, fractional actual input increases per box of cereal, and fuel being cheaper than it would with no ethanol on the market, the big food companies have decided to blame agriculture and ethanol (through the GMA) while they run up prices and play marketing games to downplay the effect. This is opportunistic profit taking at its worst.