August 2008
After several years of moderate food price inflation, food shoppers are seeing much higher food price increases. The food price increases so far in 2008 almost double the price increases in 2007 due in large part to tight supplies and strong demand for many food products as well as higher energy costs. One reason for tight supplies is that egg, chicken and beef producers have reduced their flocks and herds in reaction to higher feed costs and problems with forage supply. At the same time, Asian economies are growing strongly and importing more commodities. In particular, US exports of beef to Asia are growing since the export ban due to BSE has been lifted and US exports of pork to China have increased dramatically during the late spring of 2008. Looking forward, due to the continued tight supplies, food prices will depend on weather conditions. Favorable weather conditions for good yields will moderate food prices while weather problems will cause food prices to increase even more. Hurricanes and fall storms can affect fruit and vegetable supplies, while drought in the Midwest can affect feed grain supplies. In addition, food retailers continue to see higher transportation and energy costs that they may pass on to consumers.
Grocery store prices (“Food at Home” in figure 1) rose 7.1% from July 2007 to July 2008, well above the 1997-2006 average annual food and beverage retail price increase of 2.5%. Restaurant prices (“Food Away” in figure 1) are expected to increase at 4.6% for the rest of 2007, well above the typical 3% increase. Restaurant prices are not increasing as fast as grocery store prices because the restaurant bill includes the labor to prepare the food and overhead in addition to the higher food costs. The food price increases in 2008 are building on large food price increases from 2007, which makes the food price increases much more visible.
(Click here for the Figure 1 chart)
Over the last 12 months, most food product prices have increased. Rising prices have been lead by flour which is up 54%, rice which is up 45%, and eggs which are up 34%. Wheat products including bread, pasta and flour are up between 15 and 55% due to the tight world stocks of wheat as a result of poor wheat crops in Australia, Canada, U.S., Ukraine and other parts of the world. Vegetable oil prices are up 16% as the result of strong world demand and the growing demand for biodiesel. Dairy prices are up 8% as the result of strong export demand and higher feed prices this past year.
(Click here for the Figure 2 chart)
Over the next 12 months, I expect food price inflation to continue at a pace similar to 2007. Grocery stores and restaurants are facing both higher food ingredient costs and energy costs remain high. As shown in figure 3, prices of “Crude Foods, Feedstuffs” have been increasing at an annual pace faster than 15% for 2008. While these price increases are smaller than in 2007, these increases in ingredient costs will continue to put upward pressure on food prices.
(Click here for the figure 3 chart)
A printable PDF version of this is available.
Corinne Alexander, Food Marketing Economist
Department of Agricultural Economics
Purdue University
cealexan@purdue.edu
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