The price of cereal depends on a number of factors.
A typical grocery store offers an array of cereals. Some are sugary and fruity for kids. Others are touted as high-fiber and healthy for adults. The market for cereal is vast and ever-changing due to the fickle nature of the industry. A farmer yielding a bumper crop for the season, a competitor lowering prices and a change in the price of oil are just a few things that affect the cereal market.
Cost of Production
The primary ingredients of cereal consist of grains, sweetener and additives, such as vitamins, minerals and preservatives. The price of grains such as corn and wheat are subject to market speculation. However, the price of grains is also dependent on the price of oil due to shipping costs. When any of these commodities rise, the cost is typically transferred to consumers. For instance, a January 2011 "Bloomberg" article written by Alan Bjerga and Tony Dreibus explained that a 52 percent increase in producer spending on corn and a 47 percent increase in wheat would compel General Mills to increase the cost of some of its cereals. Commodity price hikes further impact companies that use high-fructose corn syrup to sweeten cereal.
Marketing and Branding
According to Paul Krugman and Robin Wells, authors of "Economics," a few key players dominate the cereal industry: General Mills, Quaker Foods, Post and Kelloggs. They cite that Kelloggs dominates a third of the cereal market share. These companies thrive by creating different cereals at low prices. Product differentiation derives from marketing efforts geared toward children, including mascots, toys in boxes, cartoon appearances in commercials and games on the back of cereal boxes. Smaller competitors wishing to compete with these big players do so by developing a niche product, such as organic sprouted grain cereal for raw vegans.
Cost and Competition
Other industries compete directly with the cereal industry. For example, the Atkins craze compelled many to change their breakfast habits from high-carb cereal to low-carb options, such as eggs. Other trends cut into cereal consumption, such as the proclivity toward drinking lattes and eating muffins and bagels in the 90s. People short in time in the mornings might opt for energy bars instead of cereal. Because of these trends towards products other than cereal, many of the cereal giants have introduced their own line of energy bars, hot cereals and muffins. Big retail stores introducing their own line of cereal also drives down the cost of this product.
Economics and Finance
Because the cost of producing cereal affects the price passed to consumers and ultimately, their profit margins, cereal companies take financial precautions to safeguard them from risk. Michael Cannivet and Andrew Teufel, authors of "Fisher Investments on Consumer Staples," explain this industry manages the cost of inputs through hedging with forward contracts and changing the way the product is formulated. A cereal company might enter into a forward contract to lock in the price of grain for a designated period of time, which makes it immune to sudden price spikes in the market.
