Commodities and the exchange traded funds (ETFs) that track the sector have taken a bath, so why hasn’t the price of a box of cereal at your grocery store gotten any cheaper?

Jerry Hirsch of The Los Angeles Times states the following reasons:

  • There is a tug-of-war between the nation’s supermarkets and giant food manufacturers.  Surging wholesale prices.  For example, Nestle’s Dreyer’s Grand Ice Cream rose 14% since last April, while the price that farmers get for milk has dropped 36%.
  • Commodity prices may have fallen, but they are still well above historical averages.
  • Costs for ingredients have been continuously increasing over the past five years, however, these increases in costs have not been passed down until recently.
  • Many food companies use commodities futures contracts to hedge with and are locked into contracts to purchase commodities in the future at a set price, that have yet to reflect the reversal in commodity prices.

To alleviate this predicament, many supermarkets have increased the number of house brands it offers to its customers and have started ramping up their own manufacturing of products to offer customers lower price alternatives.  In fact, Kroger (KR) states that it makes approximately 43% of the private label items sold in its stores.  Additionally, many shoppers are flocking to lower cost stores such as Wal Mart (WMT), trading down to house brands and other products that have smaller profit margins.

If food prices continue to stay where they are, one ETF that could benefit from the rush to generic is the Consumer Staples Select Sector SPDR (XLP), which is down 8.4% in the last month.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.