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High Commodity Prices To Filter Down To Consumers, Supermarkets

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FOOD PRICES

Shoppers can expect food prices to increase this year.

Despite promising signs of economic recovery, many businesses are still struggling with the double pressures of rising commodity prices and customers who are still spending less.

Squeezed companies are seeing profits plunge as the prices of everything from cotton to corn to copper increase steadily, the Wall Street Journal reports. As a result, many plan to increase prices to compensate.

Food prices will be most visibly hit.

Globally, the combination of fragile economies and soaring food prices could push millions back into poverty, according to Time Magazine:

World food prices hit a record high in January, meaning food is now more expensive than it has ever been in real terms since the U.N. first began tracking the numbers in 1990. Grains, in particular, are more expensive than ever, with corn prices up 53% in 2010, wheat up 47% and rice now at its highest level in more than two years.

The soaring price of cheese and meat means Kraft Foods has to increase prices to catch up. Kraft's profit fell 24 percent in the fourth quarter of 2010 to $540 million, from $710 million in 2009 .

Kraft, the world's second-largest food company, produces everything from Oscar Meyer Meats to Alpen cereal. The firm plans to soften the blow by offering value, with family-size packages of Oreos and Ritz crackers, for example.

Another food manufacturer, Pepsi, which produces brands from Gatorade to Quaker Oats, expects the cost of raw materials to increase by between 8.5 and 9 percent this year, according to the Financial Times. The company is bracing itself for lower earnings, the FT reports, and expects to pass increases on to consumers. Breakfast-cereal producer Kellogs expects grain prices to keep growing for several years.

But some companies don't have the option of increasing prices, the WSJ reports:

While some of these costs can be passed on to customers, many companies have been unable to increase their own prices. The economic recovery is just gaining steam, unemployment remains high, and consumers are keeping a tight rein on spending.

Why are food prices increasing? Time reports that the increases were caused by a combination of poor weather conditions affecting crops, as well as increased demand.

In a Washington Post column, Princeton University researcher Tim Searchinger argued that demand for biofuels added to the increase in prices, by straining limited corn resources, an analysis which the biofuels industry objected to.

Investors speculating on food prices also fueled the increase. Analysts hope the G20 meeting of finance ministers and central bankers in Paris this week results in action against firms and investors betting on food prices and hoarding raw materials.

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