Food Costs Rising
Shoppers and Trends
April 27, 2008
Food Costs Rising
SHOPPERS & TRENDS
The cost of food is rising, and quickly, according to recent figures from the Bureau of Labor Statistics. Their figures show that during the 2007 calendar year, U.S. food prices increased by a whopping 4.9% – .8% higher than 2007 inflation rates and 2.8% higher than food prices increased in 2006. In the seven year period prior to this most recent study, food prices increased by a modest average of 2.5% per year.
In the past, agricultural commodity prices tended to be volatile, with an overall decline trend, because they were supply-driven. Technology and productivity improvements in farming increased agricultural yields to meet supply, keeping prices down. Today, higher fuel prices are increasing the cost of transporting commodities, while various weather conditions and trade issues are currently contributing to lower supply. The result is higher prices across the board.
In the U.S., staples like milk, cheese and bread experienced especially marked hikes, with poultry, fruits and vegetables, cereal and meats following close behind. Internationally, increases in the prices of dairy and grains pushed the food price index used by the Food and Agriculture Organization of the United Nations up by almost 40% over the last year. By comparison, in the previous year period, the food price index was up only nine percent.
Overall, consumers paid an implicit food tax of $5 billion in 2006, reports the Organization for Economic Cooperation and Development. According to the Cato Center, some of this extra spending is a direct result of government policies. They say that the farm bill, which subsidizes farmers to take land out of production (for the Conservation Reserve Program), constrains supply, and that it places higher taxes on rice, sugar and dairy products. Meanwhile, they point out that the ethanol industry affects the price of corn by adding to demand.
“Globally, trade policies that isolate markets keep prices artificially higher and create barriers to cheaper imports. Domestically, the U.S. Energy Bill is really driving food prices by increasing the demand for corn, and as a result, decreasing the supply of items like wheat and soybeans. As supply of these items goes down, prices go up. Supply issues related to drought and flooding are also contributing to higher prices,” says Sallie James, Policy Analyst for Cato’s Center for Trade Policy Studies.
With global commodity stocks at historic lows, a growing demand for food, feed and fuel, tight supply, and no plan for increased agricultural productivity, this higher price phenomenon is likely to continue. The International Food Policy Research Institute estimates that global cereal prices will rise 10 to 20% by the year 2015.
Unfortunately, the poor are hurt most by higher food prices, as those with lower incomes tend to spend a higher proportion (up to 50%) of their disposable income on food. Also, as biofuels policies inflate food prices, low-income countries are paying a premium for imports. And changing world eating habits, combined with government actions, are hindering an allocation of resources that would normally lead to lower prices.
Some countries are taking active measures to improve the situation. Egypt, India, Kenya, Morocco, the Philippines and Vietnam have reduced tariffs on imports. China has introduced price controls on grains, dairy products, milk and eggs to help combat inflation. To replenish grain stocks, the European Union recently suspended their land set-aside requirements.
“Unfortunately, though, some of the steps these countries are taking may be making things worse,” says James. “Export restrictions are keeping global supply down, while price controls could potentially contribute to weakening supply if farmers choose to plant less. These actions may alleviate problems in the short term but the global long term consequences are not as positive.”
Since many of the domestic agriculture markets are protected from import competition, Americans have paid (and can continue to expect to pay) higher prices for certain products as compared to rest of the world. Americans have traditionally paid up to double the world price for dairy products and close to triple the world price for sugar. Even if global commodity prices fall, these price discrepancies will likely remain unchanged.
But retailers should take heart in knowing, says James, that consumers seem to understand that the price increases are driven by government policies – and not retailer actions. And that price hikes can be cyclic.
“Ultimately, prices work wonders when left alone. Higher prices can encourage farmers to plant more, which improves supply,” says James.