Don't Count on Lower Food Prices

Prices of food commodities have plummeted recently by an average of 50 percent from the highs they reached over the summer. Will that mean lower prices at the grocery store?

Of course not. "People still need to eat. I don't know how else to say it," said Joseph Victor, vice president of marketing at the commodity research company Allendale, interviewed by the Wall Street Journal.

Food companies and grocers want to keep high prices locked in for as long as possible, of course. And there is an information lag. As the Journal notes, consumers in general "aren't as savvy about the costs of food ingredients as they are, say, about the price of oil versus the price at their corner gas station."

Another factor: Many food producers bought grain contracts during the summer, when prices were high. So in many cases, their costs haven't actually gone down yet. A bushel of corn for delivery in December was selling in July for $6.79. Now it's selling for $3.84. Also since July, a bushel of soybeans selling for November delivery has fallen from $15.51 to $8.97.

Still, not all companies bought ingredients at their price peaks, so the drop in costs is in many cases adding to margins thanks to higher retail prices, which are always slower to fall than they are to rise.

Grain prices have fallen, along with other commodities, due to the financial crisis and a global economic slowdown. But they could easily shoot back up again. And the underlying economics governing food crops have not changed: Supplies are tight compared to rising demand, particularly among developing countries, where people are eating more meat.