New York/Chicago, Aug 28 - Do not expect immediate relief in your family grocery budget from the tumble in agricultural commodity prices this summer.
In fact, despite steep pullbacks in grains, livestock and energy, it looks like global food inflation is not going away soon, although the rate could slow next year.
Even if prices continue to slide on the exchanges in Chicago and New York, there is a considerable lag before market trends in underlying commodity input costs are passed to consumers.
By the time today's lower prices for farm goods start showing up on the store shelf and in monthly inflation statistics late this year or early 2009, futures could be rising back to new highs, economists said.
"The biggest issue you have on the consumer side in particular is: how much have we fully reflected the price increases, let alone the turn in the cycle?" said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
Manufacturers, with little pricing power in a weak economy are slow to raise retail prices. They are more reluctant to cut prices and forfeit profits when their production costs fall.
Worries about the global supply of corn, used for feed, food and increasingly biofuel ethanol, and of rice, a staple in many poor countries, have sparked protests and parallels the food shortages alleviated by the Green Revolution half a century ago.
Corn, soybeans, cattle and oil prices reached record highs in July. Since then, the Commodity Research Bureau spot grains index is down 16 percent. The spot livestock and spot food indices have each lost 9 percent.
Economists say the direct link between commodity markets and the Consumer Price Index, the government's main inflation gauge, is sketchy.
CPI has yet to completely reflect rising prices, even though in July it was up 5.6 percent from a year earlier, the sharpest increase since January 1991. Excluding food and energy prices, "core" CPI was up 2.5 percent.
According to regression analysis by Ruskin, it can take four to five months for the full impact of rising agricultural prices to show up in the CPI food component.
"The way to look at it is in CPI food next month, there will be the ag price increases from five months before next month, that will dominate any price decline from the prior month," Ruskin said.
Higher prices show up much sooner in the Producer Price Index, which rose 9.8 percent in the year to July, at least in the crude and intermediate goods categories. But economists said those two PPI components do not correlate strongly with the PPI finished goods, much less CPI.
"Those raw material inputs do not seem to affect CPI," said Jim Bianco, president of Bianco Research, a macro economic consulting firm in Chicago.
"If finding a relationship between any of PPI measures and CPI is difficult, then why should we find one with commodities?" he asked.
Bianco argues that inflation causes commodity prices to rise, not vice versa. Commodity prices are so sensitive to inflation that they respond sooner than the lagging indicator of year-over-year CPI.
"As the months unfold, if inflation stays sticky but commodities fall, then the underlying trend of higher inflation is still a positive for commodities and they are just going through the ups and downs that markets go through," he said.
FOOD FIRMS SLOW TO RESPOND
The U.S. Department of Agriculture last week warned that consumers should expect food prices to rise 5 percent to 6 percent this year, the largest annual increase since 1990, before inflation cools to 4-5 percent in 2009.
Costs for meat, poultry and fish, which account for about 12 percent of total U.S. food spending, are forecast to rise 3 percent. Fruit and vegetable prices, more than 8 percent of food spending, will rise 5.5 percent.
And USDA predicted increases this year of 9.5 percent for cereals and bakery products, a 14 percent surge for eggs and a 13.5 percent hike for fats and oils.
Many food makers might hold off until 2009 before cutting prices in order to see if commodity costs stay lower, said Morningstar analyst Gregg Warren.
Food companies were slow to raise prices when commodity costs started to jump, for fear of losing market share to less expensive store brands.
But over the past year or so, most packaged food makers, including private-label manufacturers, have raised prices in order to cope with rising costs.
"There will probably be a level were everyone decides this is the level of profitability we should be earning," Warren said.
Warren also noted that soaring food prices have also forced food makers to become more efficient, closing factories and otherwise cutting costs in order to maintain margins. Those efficiencies will remain even if commodity prices fall.