If you think food prices are high, wait until next year!
We all have been mesmerized a bit, since the election, by talk of budget cuts and budget balance, as if they holdthe magic solution to inflation. And indeed, the classic conversative spending is the root cause of inflation. Ronald Reagan's election to the presidency may be proof that a majority of voters today accept that as a truism.
But the bitter fact of life is that no matter what Reagan and a conservative-oriented Congress do to the budget, inflation is likely to rise at a 10 percent rate for the rest of this year and 1981. The prospects for the next five or six months are particularly bad because of several factors that have little to do with the budget.
Mortgage rates are soaring, domestic oil prices are being decontrolled, OPEC prices (helped by the Iraq-Iran war) will tilt up again, and wage increases are in a 9 percent pattern. Detroit has put high prices on its more fuel-efficient cars (probably a penny-wise, pound-foolish policy). Productivity growth, zero this year, will show little recovery, boosting the unit costs of production. And, worst of all, we face an explosion in food prices.
This column will concentrate on food-price prospects, because that's the sleeper in the overall inflation outlook. Somehow it got lost in the public discussion of economic problems in the past few months. The strong probability is that retail food prices will be rising sharply all through 1981. Such increases will be translated quickly into wage boosts, part of which will be due to automatic cost-of-living adjustments.
Following the U.S. drouth last summer, estimates have been successively lowered on crops in the Soivet Union, Australia, Argentina and China. U.S. feed grain crops are down by 17 percent, the sharpest drop since the painful corn blight of 1974.
For the first time in 20 years, the world will experience two years back to back (1979 and 1980) of declining grain production. Thus, while world consumption is on the rise, the world carryover of stocks is being reduced. "The world has just about used up all of its reserve stocks of grains and oil seeds," former Agriculture Undersecretary John Schnittker told me, "and anything that might have been a cushion will be gone by early 1981."
Clearly, one consequence of the pinch in supplies could be government restraints on exports. Agriculture Department economist Howard Hjort observes that the way things are progressing, foreign countries will be depending on the United States for 15 percent of their agricultural needs, compared with 2 percent 30 years ago. Because this country will have trouble boosting production, that much foreign demand is sure to cause inflationary problems at home.
According to Dennis Steadman of Chase Econometrics, high prices for corn and soybeans will cause a runup in livestock production costs in 1981, leading both meat and poultry producers to cut their output next year, pushing retail prices higher. Compounding the situation, sugar consumption will exceed world production for the second year in a row, while food marketing expenses, like everything else, are rising.
Corn prices already have gone up nearly 25 percent since the beginning of the year, and other grain prices have moved up 18 to 20 percent and are still rising. Specialty crops have suffered as well -- peanut supplies, for example, are down so sharply that retailers are getting about $1.50 a pound for nuts that normally sell for about 40 cents.
What this all means is a major inflation in bread, bakery products, milk, meat (especially pork), beverages, fats and oils, and just about everything else you put on the family dining table. And as always, food price inflation hits hardest at low-income and middle-income groups that must spend a hefty portion of their income on the basic necessities: food, shelter, and transportation.
Even if Reagan gets his way and Congress puts through a personal income tax cut, it won't be enough to make up for higher Social Security taxes and for the additional inflationary burden for food and other necessities in the low-income and middle-income groups.
At an outlook conference a few days ago at the Agriculture Department it was estimated that food prices, rising at close to 9 percent this year, will jump over 12 percent next year, led by meat and egg prices (18 and 17 percent, respectively) and by sugar (22 percent). For those who spend a lot of money at restaurants, the bad news is that away-from-home food inflation will jump from 10.4 percent this year to13 percent in 1981.
The wild card, says food consultant Schnittker, is next year's crops. A bumper crop could bring at least a flattening out of food prices toward the end of 1981. But what happens if the crop year beginning in July is also a bummer?
"I don't even want to think about it," responds Steadman.