One of the areas that has been hit by inflation over the past year is the cost of food and other grocery items. From the COVID lows in March and April of 2020, we’ve seen food prices increase by 5% or more over the past year.
There are a number of factors including consumer demand with more of us staying at home during the pandemic that have contributed to higher food prices. Some of this was due to consumer hoarding of a wide range of food items, in addition to the well-publicized hoarding of toilet paper. Especially in the early stages of the pandemic, we saw supply chain disruptions due to the implementation of protocols to keep workers safe during the production process.
Consumer behavior at the grocery store has changed due to the pandemic. Many consumers have begun to shop more frequently and to spend more on food when they do shop. This is due to concerns that have lingered from the initial phase of the pandemic and that now persist with the surge in the Delta variant.
Foods that have been the hardest hit
Beef and pork prices have not increased much from levels seen last year, but this may be due to the fact that we saw significant price increases in beef and pork last year. Overall beef prices are up about 13% and pork prices about 11% from the beginning of the pandemic.
Other food items that have seen significant price increases from June of 2020 to June of 2021 according to the Bureau of Labor Statistics include:
- Bacon +15.6%.
- Whole milk +11.2%
- Ground coffee +1.9%
- Bananas +1.2%
Why are food prices rising?
Corn prices provide an example of why food prices are rising. Demand for corn both domestically and in countries like China has increased. In the face of this increased demand, we’ve seen decreased corn yields for some major producers in Brazil and Argentina due to poor weather and labor shortages due to COVID-19.
U.S. farmers could see significant profit from the shortage, but unseasonably cold weather and droughts in the Midwest threatens to further diminish corn production, according to Axios.
This all adds up to the prospect of shortages in corn related products like corn tortillas which are likely to be in short supply on store shelves this summer.
Al Kluis, Managing Director of Kluis Commodity Advisors says, “Food costs are going up because of higher grain prices and labor costs. Also, transportation costs have increased. Most of the increase is behind us and odds are good prices will moderate or move lower by the first quarter of 2022.”
What does this mean for investors?
The rise in food prices has helped to create a favorable environment for a number of companies in the food space. According to Kluis, “Agriculture related stocks like John Deere and Corveta have moved higher, but still look attractive over the long term.”
The Kroger Company, with 2,800 stores in 25 states, is the largest supermarket company in the United States, has seen its stock move higher as the markets have built in the prospect of food price inflation leading to higher margins and profits for the company. In their guidance following the company’s Q1 earnings release for 2021, they provided upward EPS guidance for in a range that was higher than analyst estimates for the company.
Tyson Foods is another food related stock that has benefited from the rise in food prices. The stock gained 12% in a single week recently and has gained 26% over the past year. Increasing prices for beef, chicken and pork have helped fuel these gains, but the company’s CFO cautions that inflation in the company’s cost may outstrip their ability to raise prices.
Kluis says, “Farm prices and profits have improved dramatically since their COVID lows in April of 2020. We have had good profit opportunities for the 2021 crops and have locked in some 2022 prices at some high historical values. The one downside to the rally has been a large increase in input costs, but the bottom line is that farmers are likely to record or near record income for 2021 and possibly 2022.”
Food price inflation is likely to continue for the remainder of 2021 and perhaps into 2022. For guidance on how to play this situation as an investor, give your Wedbush advisor a call.
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