Expect Higher Prices at the Grocery Store

Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After yesterday’s announcement by the Agriculture Department that 14 states in the southern U.S. have been declared a disaster area due to extended drought conditions, consumers should expect higher prices at the grocery store. The affected area, which includes 351 counties in the Wheat Belt, is responsible for providing more than 1/3 of the wheat crop in the United States. Industry experts predict at least 1/4 of the wheat crop will be useless and abandoned.

The drought, perhaps the worst on record in over 50 years, has led to sky high crop insurance claims already approaching $11 billion, with the final total expected to reach near $25 billion.

So what’s the end result? The 25% decrease in available wheat crop could have a trickle-down effect on nearly every food company in the country. A basic supply and demand situation will occur, causing prices to increase across the board for products with a high content of wheat-based ingredients. Companies like Mondelez International (NASDAQ: MDLZ), the new umbrella corporation spun off by Kraft Foods to serve as parent to major snack brands like Oreo, Nabisco, Cadbury and Trident, will be forced to pay higher prices for supplies. Undoubtedly, that cost increase will be passed to consumers.

Breakfast cereal companies like Kellogg (NYSE: K) will experience similar increases in supply costs that will raise prices at the grocery store. Since the majority of Kellogg’s cereal and breakfast bar products contain wheat, it’s feasible to expect those brands to increase in price proportionally to the amount of wheat used in the manufacturing process.

General Mills (NYSE: GIS), the other big dog of the breakfast business, will also leave shoppers holding the proverbial bag (um… er, box…) when the financial impact of the wheat shortage reaches factories. Additionally, since General Mills has become a major supplier for commercial bakeries, offering a massive selection of flours by type and category, cost increases will ripple through the bakers to their own end consumers. The cost of everything from pies to cookies to birthday cakes will be going up.

But just how much of an increase is expected? The experts have yet to make any public predictions, most likely because they’re still crunching numbers. The Agriculture Department’s Economic Research Service is scheduled to release their monthly report, the World Agricultural Supply and Demand Estimates (WASDE) tomorrow at noon. The report contains a section regarding the department’s outlook on wheat supply and usage, primarily based on the events of the preceding month. The WASDE is likely to have an impact on the agricultural sector and the price of stocks directly affected by a shortage of wheat crop.

The simple lack of enough wheat, however, might not be the only factor leading to an increase in prices at the grocery store. As a result of the drought and subsequent record-breaking insurance claims from farmers who lost crops, I won’t be surprised when I hear the cost of crop insurance policies went up this year. Insurers will raise premiums for farmers, who will in turn raise their own prices on all crops, not just wheat. The trickle-down effect of the worst drought in five decades will eventually hit our country’s families in the one place that’s the most important to take care of – their bellies. 


Gambone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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