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Pumped up: Surging fuel prices trickle down to form higher costs for just about everything

POSTED: April 24, 2008 5:00 a.m.
Michael Phillips/The Times

Nell Rowe picks out produce at Jaemor Farms Market. The price of produce continues to increase with the increase in gas prices.

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When gasoline prices first began to climb about three years ago, people were mainly concerned about the cost of driving. They compensated by eliminating unnecessary trips or switching to more fuel-efficient cars.

If you didn’t drive, gas prices weren’t an issue.

But now, as prices at the pump have remained high for two years and crude oil is selling for more than $100 a barrel, manufacturers of all types of products have had no choice but to pass along their fuel costs to customers.

Food prices are affected even more, because farmers and other food producers have been hit with a double whammy. They’re spending a lot more on fuel, which is needed both for food production and for transporting the food to market.

And the federal government’s push to make the United States "energy independent" by manufacturing corn-based ethanol means that much of the corn that was once used for human consumption or livestock feed is now being diverted to make fuel.

This has driven up not only the price of corn, but all types of grain. As more farmland is devoted to corn, less acreage is available to grow other plants, so demand is pushing up the cost of everything else.

And experts say the situation could get a lot worse.

Food prices are likely to remain high

"Energy prices sometimes spike due to events that have nothing to do with the broader economy (such as natural disasters)," said Roger Tutterow, a Mercer University economist. "But in the past couple of years, we’ve seen different forces at work."

He said energy prices have gone up about 19 percent over the last 12 months, and food prices have gone up more than 4 percent.

"A significant part of the surge in energy prices is due to the weakening of the (U.S.) dollar," Tutterow said.

He envisions several scenarios that could bring down energy prices. The global economy could slow down, which decreases demand for fuel. The value of the dollar on the world market could improve. Or OPEC, the entity that controls oil supply in the Middle East, could agree to increase production.

But even if the price of oil drops, food will probably stay at or near its current prices.

"Energy prices are volatile," Tutterow said. "But there is a general upward trend for most goods and services, so you rarely see food prices go back down."

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, said the cost of edible commodities, such as corn and wheat, goes up for the same reason oil prices do. When investors see a higher demand for a product, they drive up the price so they can make a profit.

"I’ve never (before) seen grain prices quadruple in six months, and I think that was mainly a speculative bubble in the futures market," he said.

The soaring cost of wheat has driven up prices on household staples such as bread and cereal. And while prices for all types of goods have increased, Dhawan said consumers are particularly sensitive when it comes to food.

"High oil prices leave less disposable income in people’s hands, and that uncertainty is raising anxiety," he said. "People have lost jobs, their homes are getting foreclosed, so they notice food prices more."

Unlike some economists, Dhawan isn’t afraid to utter the "R word."

"I think we’re in the middle of a storm right now," he said. "The recession began three or four months ago and could last through (next) winter."

Supermarkets struggle to contain costs

But while people are worried, most have not yet changed their behavior when they shop for groceries.

"I honestly haven’t noticed any trends in sales," said Darrell Wiley, owner of J&J Foods in Gainesville. "If anything, I see steady growth at our stores, which may be attributable to fewer people eating in restaurants."

Maria Brous, spokeswoman for Publix supermarkets in Georgia, said the chain does not track customer buying habits. But Publix stores haven’t seen a drop in sales.

"Folks still have to eat," she said. "They’re still buying the same volume of food, but the items may be different."

Brous said grocery stores are doing what they can to keep prices down, but they already operate on a razor-thin profit margin and can’t absorb additional expenses.

"It’s not only the fuel cost. It’s ethanol; it’s the high price of commodities," she said. "We are maximizing our truckloads and our routes, so we don’t have half-empty trucks."

Brous said Publix, which has always emphasized quality over low prices, is now trying to help customers make ends meet.

"We’re looking at adding more value, with more ‘Buy one, get one free’ offers on things people buy on a regular basis," she said.

Though you might assume it would cut into a store’s profits to offer items for free, Brous said that’s not the case.

"We don’t lose money on those deals because we gain customer loyalty," she said.

Locally owned J&J has based its reputation on being a lower-cost alternative to the national chains. But J&J is facing the same challenges as any other food retailer.

"We’ve held our prices down for as long as we can," Wiley said. "We hate raising prices. It’s terrible for people on fixed incomes to deal with."

But while some customers have complained bitterly about price increases, they haven’t stopped buying their favorite foods.

Price of corn affects many products

However, Wiley worries that the federal ethanol program is really going to begin hurting consumers.

"Anything that has corn or a corn by-product in it has gone up," he said. "That includes products sweetened with corn syrup, which is in so many foods. And corn oil prices have gone up 40 to 50 percent."

Wiley said he believes in a free-market economy, but taking corn out of the nation’s breadbasket and putting it in gas tanks could be disastrous.

"I wish the government would stop subsidizing corn and would get out of the ethanol business," he said.

Tom Hensley, vice president of the Fieldale Farms poultry firm, said the high price of feed corn is forcing the company to cut production by 5 percent, starting next month.

"Rather than lose money on those chickens, it’s cheaper just to not produce them," he said.

Fieldale has already been hit by the high cost of diesel fuel for its trucks, Hensley said.

"We’re paying $2 million more a year for fuel than we were before," he said. "But that pales in comparison to the price of corn."

So far, the store price for chicken hasn’t gone up much. But Hensley said that will change as companies can no longer absorb the cost of feed.

"Prices would need to go up about 50 percent to reflect our true cost," he said.

Buying local may not be cheaper

What’s the best strategy for consumers who want to save money on food? Some experts are advising people to "buy local," because it cuts the amount of fuel needed for transportation.

But Jimmy Echols, owner of the Jaemor Farms orchard and market in Hall County, said locally grown food isn’t necessarily all that much cheaper.

"We’re subject to the same influences as everyone else (who produces food)," he said. "A lot of people don’t realize that natural gas is the feedstock for a lot of our fertilizer, and the price has doubled over the last year and a half."

Echols said many people don’t understand how complex the food economy is. "For example, we sell locally grown eggs, but the grain (fed to the chickens) is from the Midwest, so it’s affected by fuel and feed costs."

He added that people who try to "eat local" may have to settle for a very restricted diet.

"There’s not much growing right now except dandelions," Echols said. "Buying local may be helpful in the summer, but not the rest of the year. Right now, we’re buying Washington State apples (to sell in the market), and the freight charge has increased tremendously. Most of our vegetables are coming from California and Florida, and our grapes are still coming from Chile."

Smart shoppers can save cash

Debbie Wilburn, a consumer science agent with the Hall County Extension Service, said she’s worried that high food prices will undermine the government’s effort to decrease the rate of obesity and other nutrition-related ailments.

"It could have a tragic impact, because we’re trying to promote eating more fruits and vegetables," she said. "We’re also trying to encourage people to consume more calcium, and look at the price of milk now."

Wilburn has been working to help consumers keep their grocery bills down while still eating healthy foods.

"Become a wiser shopper. Compare unit prices. Buy things in bulk," she said. "Buy fresh fruits and vegetables in season. Or buy frozen, which may be cheaper."

Changing our shopping behavior is the only way to cope, Wilburn said, because we may be in this for the long haul.

"Gas prices are going to be affecting so many things in our lives," she said.

Many Gainesville residents say they aren’t happy about the high cost of food, but they don’t feel there’s anything they can do about it.

As she finished up a grocery trip Thursday, Lucille Carter said prices haven’t yet reached the point where she needs to change how she shops. "If I want it, I buy it," she said.

Another Gainesville resident, Hazel Shuman, said she has not omitted any items from her grocery list because of cost.

"And I’ve always looked for sales, so that hasn’t changed," she said. "But I do worry about what’s going to happen if the prices keep going up. You’ve got to eat."

Viola Saxton, on the other hand, is already feeling squeezed by the tight economy. She recently qualified for Social Security and is on a fixed income. But she’s too young to enroll in Medicare, and she has medical bills she can’t pay.

So Saxton is trying to make the most of her grocery dollars. She watches for sales and goes to the least expensive stores in town.

"But I still buy the things I have to buy. What else are you going to do?" she said. "It’s just like with the gas prices. They can charge as much as they want, because they know you’re going to pay it."



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