August 13, 2004
Food shoppers are paying much higher prices than they were last year, even though food prices have declined between June and July. These price increases are due in large part to reduced meat and milk supplies, higher costs for imported foods as a result of a weaker dollar, rising energy costs which increase the costs of food processing and transport, and in smaller part to the economic recovery which is increasing consumer demand for food.
Grocery store prices rose 4.6% from July 2003 to July 2004, compared to last year's rise of 2.2% (figure 1). This food price increase is well above the 1993-2003 average annual food and beverage retail price increase of 2.6%. This food price increase will be less than the energy price increase of 14% but greater than the 1.8% non-food-and-energy consumer price rise.
Grocery store prices have generally risen over the last 12 months, and by July were rising much faster than restaurant food prices and more rapidly than non-food prices (figure 1).
The USDA estimates that grocery store price increases will be in the 3.5-4.5% range for the rest of 2004 and in the 3-4% range for 2005, which is twice the rate of core inflation. Moderating farm prices will be largely offset by rising food marketing costs. Restaurant prices are expected to increase more slowly, in the 2.5-3.5% range for the rest of 2004 and 2005.
To place the current food prices in a historical perspective, the last time grocery store prices increased at this pace was in 1990 (figure 2). In contrast, non-food goods and restaurant prices increased at a close to average pace over the last year.
Rising food prices over the last 12 months have been lead by dairy and meat (figure 3). The most dramatic retail price increases have been in the dairy sector with a 39% increase in the price of butter and a 28% increase in the price of milk. Retail beef prices have been at near record levels in 2004. The 56% increase in the price of navel oranges reflects the fact that oranges sold for an unusually low price in July 2003, and does not indicate that oranges are currently expensive. Only a few items have fallen in price over the last 12 months, notably tomatoes, lettuce, grapes, coffee, pasta, sugar and turkey.
For 2004, the USDA forecast is for retail price increases of 8-9% for beef and veal, dairy products and fats and oils. Egg prices are forecasted to increase at 7-8%. Pork prices are forecasted to increase more slowly at 4-5%. One explanation for theses expected price increases is the continued popularity of “low carb” diets. Currently, there is some evidence that the “low carb” diet trend is moderating. That said, the popularity of these diets has increased consumer awareness of the carbohydrate content of foods and generated the perception that carbohydrates should be avoided.
Looking forward, the federal advisory panel revising Dietary Guidelines for Americans just released its report, and there are two significant changes from the guidelines issued in 2000: increase consumption of whole grains and decrease consumption of sugars. Based on this report, the USDA is in the process of revising its food guide system, formerly known as the food pyramid. A second change worth noting is that starting in 2006, the nutrition label will also report the content of trans fats. Currently, food production companies are reformulating their products to reduce the content of trans fats.
While many factors determine retail food prices, the two dominant factors in the coming year will be farm commodity prices and energy costs. The intermediate food products for manufacturing have been rising all year, led by year-over-year increases in crude foods and feedstuffs, especially meats, grains and dairy products (figure 4). These sharp cost increases have increased the wholesale prices of finished foods. Overall, the wholesale cost of food and inputs to food production have risen at a substantially faster pace than the costs of all finished goods. Wholesale food prices are expected to moderate next year with finished food prices rising 2-4%.
Again, to place the current cost increases in perspective, food wholesale costs are rising at the fastest rate since 1992 (figure 5). Food companies have passed some of these increased costs on to consumers, but their margins remain very slim. Notably, the farmer's share of the food dollar has increased from 20.9% in 2003 to 23.7% in May 2004. Looking forward, food companies will attempt to raise prices and restore margins. However, depending on the strength of the economic recovery, consumers may resist these price increases.
The farm-retail spread has been increasing at a declining rate since 1999, and the 2003 farm-retail spread increase of 2% is as small as this increase has been since 1981 (figure 6). Moving into 2004, the farm-retail spread has been increasing. Food marketing costs increased 2% in 2003, and despite the price of energy, food marketing costs are increasing at less than 1% in early 2004.
Corinne Alexander, Food Marketing Economist
Department of Agricultural Economics
Purdue University
calexan@purdue.edu
J. N. Uhl, Food Marketing Economist
Department of Agricultural Economics
Purdue University
uhl@purdue.edu
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