Prices & Outlook: Food Prices

Fall 2009 Retail Food Prices
Corinne Alexander
August 2009

After several years of record food price inflation, food shoppers are seeing moderate food price increases and even some food price decreases.  The food price increases so far in 2009 are about half of the price increases in 2008 due in large part to the global recession and anticipated large grain crops to be harvested in the coming months. With the global recession, there has been a dramatic decrease in export demand for US agricultural products which in turn increases the domestic supply of those products, driving down the prices.  In particular, US exports of pork have fallen 22% and dairy exports have almost ceased.  Looking forward, food price inflation will depend on weather conditions and the pace of the global economic recovery.  Favorable weather conditions for good yields will continue to moderate food prices.  Hurricanes and fall storms can affect fruit and vegetable supplies, while drought in the Midwest can affect feed grain supplies. 

Grocery store prices declined 0.9% from July 2008 to July 2009, well below the 2008 increase of 6.4% and even below the 1997-2006 average annual food and beverage retail price increase of 2.5%. Restaurant prices are expected to increase at 3.5 to 4.5% for 2009, only slightly above the typical 3% increase.  Restaurant prices are not moderating as fast as grocery store prices because the restaurant bill includes the labor to prepare the food and overhead.  The food price increases in 2008 are building on large food price increases from 2007, which makes the food price increases much more visible. 

Over the last 12 months, many food product prices have returned to levels from two years ago or the food price increases are more moderate than in 2008.  One household staple that illustrates what has happened with food price inflation over the last several years is eggs.  In July, 2007 the US city average price for a dozen grade A eggs was $1.50 and this increased to $2.01 in July of 2008 and then fell back to $1.50 in July of 2009. Another household staple where prices have moderated is milk; the July 2009 US city average price for a gallon of whole milk was $2.99, compared to $3.96 in 2008 and $3.74 in 2007.  The reason dairy prices are lower in 2009 compared to the previous two years is that with the global recession but export demand for dairy products has declined dramatically, increasing domestic supplies.  One food categories where prices are increasing is fruits and vegetables which are increasing at 1.5 to 2.5% in 2009, which is a more moderate increase than the 2008 increase of 6.2%.  In the case of cereal and bakery products, these prices are expected to increase 3 to 4% in 2009, again much lower than the 10.2% increase in 2008.  As global grain supplies increase due to large crops, prices of cereal and bakery products would continue to moderate.

Over the next 12 months, food price inflation will depend on the direction of food ingredient costs and energy costs which in turn depend on the pace of recovery for the US and global economies.  So far in 2009, energy prices and commodity grain prices are substantially below the records of 2008 which will lead to more moderate food price inflation over the next 12 months.