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RETAIL VIEW: Food prices should register modest gains in 2009

Both food suppliers and food retailers are in relatively good shape and should see modest sales and price gains in 2009, according to two economists who participated in a recent webinar sponsored by the Food Marketing Institute.

Ephraim Leibtag, who works with the U.S. Department of Agriculture's Economic Research Service, and Kenneth Zaslow, a food analyst with BMO Capital Markets, looked at food prices and costs from a historical perspective and concluded that the sector is in much better shape than many other segments of the economy.

In fact, Mr. Zaslow said that he expected no bankruptcies in the food industry this year, as both retailers and suppliers adjust to the needs of consumers and bring supply and demand in line with each other.

Mr. Leibtag pointed to numerous facts and figures that revealed that food prices have remained much less volatile than most other sectors of the economy over the past decade. While it is true that prices of the major agricultural commodities grew by 80 percent from January 2006 to their peak in summer 2008, that was well below average for all commodities.

In fact, over the six-year period from early 2002 to summer of 2008, commodity prices rose about 130 percent. During that same period, all commodity prices rose by 330 percent, led by the 585 percent increase of the price of crude oil.

But the higher they climb, the lower they fall. While oil prices and the price of all commodities have dropped to about one-third of their 2008 peak rates, agricultural commodity prices have only dropped about 25 percent. This manageable decline is much better than the economy as a whole or the stock prices of almost any publicly traded company.

Mr. Zaslow said that the food and retailing industries are adjusting well to consumer demands. He said that retailers are switching to more value-priced options, such as private labels. And he said that suppliers are cutting back on inventory and he sees the supply of raw product declining to meet the demand.

Mr. Leibtag said that these changes and adaptations should result in an overall rise in food costs of about 3-4 percent in 2009. This compares to more than a 5.5 percent growth in 2008. That price inflation was fueled by the high cost of both the commodities and fuel. While those two inputs will be down in 2009, they will still warrant an overall increase in prices.

For the fresh vegetable sector, Mr. Leibtag sees prices increasing 3.5-4.5 percent, while fruit could register a 4-5 percent hike. The two analysts said that the fruit and vegetable industry could get a boost from a consumer trend to eat more meals at home and to build more meals from ingredients rather than buying pre-made items.

However, Mr. Zaslow said that it was hard to predict how much consumers would change their habits to incorporate food-preparation practices. For health reasons, he said that it would be great if Americans began cooking from scratch and increased their consumption of fruits and vegetables, but he did not know if a major shift was realistic.

He said that consumers are still faced with the issue of not having enough time and are still looking for timesaving ideas in meal preparation.

However, the Feb. 24 webinar did reveal that frozen entr?e sales have registered a sales decline with more people indicating that they are building their meals from ingredients rather than from the frozen food case.

The two economists said that there is plenty of evidence that consumers are trading down and buying less expensive food alternatives when given the opportunity. This is especially manifesting itself in the increase in sales of private-label items at the supermarket, which are growing at a 15 percent clip over the past year.

There is also evidence that consumers are saving money by eating in more often. Mr. Zaslow said that traffic in restaurants on weekends is fairly normal, but there has been a big decline in business from Monday to Thursday. As a group, consumers are giving up casual weekday dining for cooking at home. This is a trend that should help retailers.

The economists would not state which segment of the retail community could best capitalize on this trend, but they advised all retailers to offer value and be aware that consumers are more price-sensitive than they were a year ago. He said that food manufacturers are also noting this change and are increasing brand promotions that emphasize the value propositions of their products and are not introducing many new items.

Mr. Zaslow said that the one situation that could change his relatively optimistic view would be a continuing worsening of economic conditions into a global depression. However, he already sees signs of the situation improving, so he said he does not expect that to happen.