Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

Federal forecasters estimate retail food prices will rise as much as 3.5% this year, the biggest annual increase in three years, as drought in parts of the U.S. and other producing regions drives up prices for many agricultural goods.

Globally, food inflation has been tame, but economists are watching for any signs of tighter supplies of key commodities such as wheat and rice that could push prices higher.

In the U.S., much of the rise in the food cost comes from higher meat and dairy prices, due in part to tight cattle supplies after years of drought in states such as Texas and California and rising milk demand from fast-growing Asian countries. But prices also are higher for fruits, vegetables, sugar and beverages, according to government data. In futures markets, coffee prices have soared so far this year more than 70%, hogs are up 42% on disease concerns and cocoa has climbed 12% on rising demand, particularly from emerging markets.

Drought in Brazil, the world's largest producer of coffee, sugar and oranges, has increased coffee prices, while dry weather in Southeast Asia has boosted prices for cooking oils such as palm oil.

Terri Weninger, a married mother of three in Waukesha, Wis., said rising food prices have led her to cut back on higher-end meats and sugary snacks for her family. "Things are definitely more expensive," the 44-year-old said. "I can't believe how much milk is. Chicken is crazy right now, and beef—I paid $5 a pound for beef!"

Though rising, U.S. food inflation isn't yet near some lofty recent levels. In 2008, food prices jumped 5.5%, the most in 18 years, and they climbed 3.7% in 2011. Inflation also could be tempered if U.S. farmers, as expected, plant large corn and soybean crops this spring and receive favorable weather during the summer. That would hold down feed prices for livestock and poultry, as well as ingredient costs for breakfast cereals and baked goods.

The U.S. Department of Agriculture estimated last month that retail food prices will rise between 2.5% and 3.5% this year, up from 1.4% last year. The inflation comes despite sharp decreases over the past year in the prices of grains, including corn, after a big U.S. harvest. In other years—notably 2008—surging grain prices were a key contributor to higher food costs.

Food prices have gained 2.8%, on average, for the past 10 years, outpacing the increase in prices for all goods, which rose 2.4%, according to the government. Overall consumer prices are expected to rise 1.9% this year, according to economists surveyed by The Wall Street Journal.

RETAIL PRESSURES

Still, the price increases pose a challenge for food makers, restaurants and retailers, which must decide how much of the costs they can pass along and still retain customers at a time of intense competition and thin profit margins. During previous inflationary periods, food makers switched to less-expensive ingredients or reduced package sizes to maintain their profit margins. Retailers and restaurants usually raise prices as a last resort.

White Castle Management Co., a closely held operator of some 400 hamburger outlets, said its beef costs jumped 12% in February from a year earlier and that it forecasts prices by August will be nearly 27% above last year's. But White Castle plans to absorb the increases as long as it can, keeping its menu prices the same, a spokesman said.

Unlike larger chains that have sophisticated hedging strategies to help offset higher commodity costs, "as a relatively smaller regional chain, these strategies are more difficult for us to execute," said the spokesman for the Columbus, Ohio, company. Still, "we will resist raising prices."

 

Fatburger North America Inc., which has 150 restaurants globally, likely will increase its burger prices by up to 5% next month to reflect higher beef costs, said Andy Wiederhorn, chief executive of the privately held company. "The prices will stay up for a year and come down in the middle of next year when supply catches up with demand," he said.

One reason prices are higher now is the lingering effect from the historic 2012 U.S. drought, which sent animal-feed prices surging to record highs and caused livestock and dairy farmers to cull herds, analysts said.

In California, the biggest U.S. producer of agricultural products, about 95% of the state is suffering from drought conditions, according to data from the U.S. Drought Monitor. This has led to water shortages that are hampering crop and livestock production.

U.S. fresh-vegetable prices that jumped 4.7% last year are forecast to rise as much as 3% this year, while fruit that gained 2% last year will rise up to 3.5% in 2014, according to the USDA.

Dry weather in Brazil has contributed to a dramatic increase this year in prices for arabica coffee, the world's most widely produced variety. Arabica-coffee futures, which were at a seven-year low last year, settled at a two-year high of $2.0505 a pound on March 13.

In each of the past two years, global food prices on average declined from the previous year, as farmers ramped up production of wheat, sugar and other commodities, according to the United Nations Food and Agriculture Organization, which publishes a monthly food-price index. But that index rose 5.2 points to 208.1 last month compared with January, the sharpest jump since mid-2012.

EMERGING MARKETS

Food-price increases are a particularly touchy issue for emerging markets, where spending on food accounts for a higher share of monthly budgets than in wealthier countries.

In 2008, a spike in food prices caused riots from Haiti to sub-Saharan Africa and South Asia. Three years later, in 2011, rising food prices were a factor behind the Arab Spring protests in North Africa and the Middle East that ultimately toppled governments in Tunisia and Egypt.

The increase in global prices last month surprised some economists, and raised the specter of more severe increases that could hit the world's poorest countries, economists said.

 

"To be honest, until a month ago, our feeling and thinking was that most markets were well-supplied," said John Baffes, a senior economist at the World Bank. "Now, the question is: Are those adverse weather conditions going to get worse? If they do, then indeed, we may see more food price increases.