It’s not just oil that’s been causing problems: food costs are soaring, so manufacturers and distributors have been putting up prices, and changing the composition of products.

Soaring oil prices are forcing a growing list of US businesses to reshape their futures: Ford and General Motors are cutting back production, closing plants and sacking staff; airlines are either going broke, or cutting staff, routes, plane numbers and other facilities, like British Airways, Continental and United; Some are putting up prices like chemical giant, Dow, which boosted prices by 20% at the start of this month.

But in the huge packaged goods grocery market in the US, the cost increases are being handled in different ways: Kellogg is putting up prices by shrinking the box sizes of some of its leading cereals, Kraft is altering the shape of bottles and the marketing of pizzas.

For example, Kraft has substituted water for soybean oil in some products because of the surge in the cost of the soy products: the upshot is a cost saving, and also the unintended benefit of lowering the fat content of its well-known mayonnaise brands.

Kraft also changed the shape of some of the packaging containers for its products, widening the mouth of jars to enable consumers to more completely scrape out all the stuff in the jar.

Companies have rationalised product lines by getting rid of small-sized packs of some foods, such as rice and pasta. Instead, they’re shipping much larger sizes to supermarkets because US consumers have started buying more larger-sized packages of staples like flour, rice and pasta.

The companies lower their costs by reducing the congestion on production lines; frozen pizzas are selling in greater numbers from supermarkets because they are cheaper and are being marketed as an alternative to going out to a Pizza Hut or other chain and having to spend money not only on the food, but the petrol as well.

And in a move we will no doubt encounter here soon, US media reports at the weekend said Kellogg, the world’s major cereal maker, has cut the box size of six of its cereals, including Froot Loops and Corn Pops. The reduction is an average 2.4-ounces, meaning a second price rise after Kellogg raised the price of many of its products in January.

That will lead to an effective price rise, the second this year, as it tries to cope with soaring grain and energy costs.

It says the cut in box size will produce an effective price rise in the mid to high single digits (7%-9% perhaps), which will be above inflation.

On Friday, the US Labor Department said the food component of its consumer price index was up 5.1% in May from a year earlier: the overall CPI in May was up 4.2% over the year to May; food costs are rising faster than other costs, as are oil and natural gas prices.

Corn prices hit a record in the Chicago futures market on Friday, the eighth day in a row of records. But that might not be enough for Kellogg: rice and wheat are also at near record levels. Soybeans are back near their all-time high.

The Midwestern floods in and around Iowa have damaged corn crops in that state, plus half a dozen surrounding states which are all big grain growing areas. Yields are falling and the price is rising. It will be a month or two before the full impact is apparent on the 2008-09 US corn harvest, which is the biggest single grain crop in the world, and the most important because other grain prices feed off it.

Higher oil costs are raising the distribution costs for Kellogg and other Midwest manufacturers: rail and road are costing more because the operators of those forms of transport are having to pay sharply higher fuel costs.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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