Why food costs could be headed even higher

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Food manufacturers are facing growing problems getting their products to market

In the government's most recent Consumer Price Index (CPA), the index for food consumed at home was up 0.6% over the last 12 months. Four of the 6 major grocery store food groups increased during this time, led by meats, poultry, fish, and eggs, which increased 2.1%.

There's a very good reason eggs are more expensive. A spring outbreak of avian flu in the Midwest resulted in the loss of millions of hens. But prices of other food items have been rapidly rising too.

"There have been different things in different industries, but I think when you put it all together, it means overall, what people are spending on groceries has increased," dietitian Leah McGrath told the Ashville, N.C., Citizen-Times.

Transportation problems

But other factors beyond droughts and disease may be pushing prices higher. A report by the Boston Consulting Group (BGC), produced for the Grocery Manufacturers Association (GMA), has found that 80% of consumer packaged goods (CPG) companies are finding it harder to transport their products to retail stores.

But wait – haven't fuel costs been falling for months? Shouldn't transportation costs be going down?

Maybe they should but they aren't. Since the last report in 2012, CPG companies’ freight costs have risen 14%, reversing all other supply chain cost-saving efforts. Costs have risen to an annual total of $15.5 billion.

“Supply chain leaders are caught between two challenging transportation trends, as they either must pay more to meet service-level expectations or sacrifice speed and reliability for cost efficiency,” said Daniel Triot, Senior Director of the Trading Partner Alliance of the Food Marketing Institute and Grocery Manufacturers Association. “That is hardly a prescription for long-term success.”

Will costs get passed to consumers?

But it could well be a recipe for even higher prices at the supermarket, since companies will make every effort to pass along those added costs to protect profit margins.

The report suggests driver shortages and chronic capacity squeezes, along with growing congestion and delays are contributing to rising costs. They threaten delivery times, inventory management, and service levels. Aging transportation infrastructure also comes in for its share of the blame.

“Supply chain leaders used to view transportation problems as cyclical, but these problems are here to stay,” said Peter Dawe, a BCG partner and coauthor of the report. “Now we're seeing such an acute capacity shortage that it can be near impossible to get loads on some lanes moving. Transportation is becoming a strategic planning consideration, not a simple commodity to be sourced.”

Shifting tactics

BCG says food companies are shifting tactics to deal with these supply chain challenges. Some food companies, such as Procter & Gamble, Bumble Bee, and Land O’Lakes, are already deploying new approaches and achieving results.

In the meantime, consumers could face rising food prices at a time when inflation is tame and oil prices are actually going down.

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