There’s a lot of talk in financial news at the moment about increasing costs of living and increasing grocery prices. For example – check out this article on CNN today discussing increasing grocery prices in the US. So what’s going on?

As with almost all discussions on pricing – Supply and Demand is an important factor influencing the price of groceries; but we also have to consider the costs for farmers and food supply companies to produce groceries. If it costs more for groceries to be made and delivered to the supermarket, these increased prices will usually be past on to you the consumer.

Supply of many farm produced products has been undermined by bad weather events in many parts of the world. One example of this is in Australia where recent floods and cyclones have devastated farming crops. This means there are far fewer good quality groceries are being produced or supplied in Australia.

Demand for products continues to be high, particularly many grain products as these are not only used to provide groceries – they are also purchased and processed to make fuel – ethanol. Note that grains are widely used in the production of other food products, for example many popular cerials are made from grains, and so an increasing price of grains flows onto the cost of other grocery products.

Recent dramatic events in the Middle East, in particular the uprising in Libya, has resulted in the price of oil increasing significantly. Libya is a major producer of high quality crude oil. So concerns about the security of supply from Libya has significantly increased crude oil prices. Amongst other things, crude oil is used to make fuel (gas / petrol), and gas is obviously required to transport goods including groceries, so increasing fuel prices ultimately means higher grocery prices.

So in short, increasing prices of grocery prices has resulted from:

• increasing costs of producing grocery products; higher fuel costs due to crude oil prices influenced by events in the Middle East,
• higher grain costs due to competing demands from ethanol fuel producers as well as food producers.
• bad weather events around the world which have reduced the supply of farm based products which are used to produce groceries