June 22, 2004
Food shoppers are experiencing more rapidly rising food prices this year. This is due to an economic recovery which is increasing consumer demand for food, reduced meat and milk supplies, higher costs for imported foods as a result of a weaker dollar, and rising energy costs which increase the costs of food processing and transportation.
 Retail food prices increased at a 3.4% annual rate in the first 5 months of this year. This compares to the 1997-2002 annual food and beverage average retail price rises of 2.2%. Since the average family of four spends about $184 per week for food, this year’s predicted 3-4% food price rise would add about $5.50-7.35 per week to the family food bill. This food price will be less than the energy price rise of 16% but greater than the expected non-food-and-energy consumer price rise of 1-2%.
The economic recovery is contributing to stronger food spending and higher prices. Consumer food expenditures are increasing about 3.5% from year earlier levels. This is about the same as the food price rise, so real consumer spending is not yet increasing. Still, food shoppers appear to be increasing food purchases and buying more expensive foods, a sign of rising incomes. Shoppers remain price conscious, however, as foodstore sales are growing more rapidly at warehouse clubs and supercenters than at traditional supermarkets. Some food companies are finding it easier to raise prices in this economic environment. Wholesale finished food prices rose a strong 5.4% from January to June, partly reflecting higher raw food prices and consumers’ higher willingness to pay.
Record milk prices have accounted for about one-half of this year’s retail food price rise, although dairy product prices fell in June and are expected to decline from record levels for the remainder of the year. The farm price of milk reached a record high of $20 per hundredweight in May and is expected to average $16 this year, compared to last year’s $12.50. Retail milk prices rose 15% in May, the largest monthly rise since July 1946's 15.5% rise. These high milk prices contrast with 2002-2003’s 25-year low farm milk price caused by a surplus of dairy cows and milk. Those low milk prices--along with reduced supplies of a growth hormone fed to dairy cows, tight worldwide supplies, higher dairy cow feed costs, and slow gains in milk per cow-- have been responsible for this year’s rising dairy product prices. Consumers’ strong demand for cheese and other dairy products, despite continued reductions in fluid milk consumption, have also put upward pressures on dairy prices. Retail food prices should moderate in the second half of the year as milk supplies expand.
Shoppers are also paying more for center-of-plate foods this year. Retail prices of meats, poultry, fish and eggs are running about 10% higher than year-earlier levels. Lower beef production this year as we move into the cook-out season is raising retail beef prices, which nevertheless remain below last fall’s record levels. Consumers’ tastes for chicken and pork, especially bacon, have kept these prices higher than last year despite increased production. Chicken and turkey prices, particularly for breast, drum, and wing parts, are also higher than last year. Demand for these protein products is being fueled by special diets, rising incomes, and strong meat exports.
Other foods are also contributing to this year’s food price rise. Retail fats and oils prices are up 7.5% from year earlier levels, largely due to higher soybean prices. Fruit and melon prices are up modestly due to weather problems while fresh fruit and vegetables prices are similar to last year. The May-June rains have taken their toll on the price and quality of locally produced fruits and vegetables but supplies are adequate.
Food prices for the rest of the year will depend on the weather during the growing, the fall harvests, the speed of recovery in meat production, and the rate of inflation in food marketing costs. Inflationary pressures are expected to rise from currently low levels for the rest of the year and into 2005. Energy costs have a significant influence on all phases of food production and marketing. costs. Wage costs will probably rise in the year ahead. Along with rising food marketing costs, higher farm prices have also contributed to this year’s food price rise. Farm prices are running 25% higher than year-earlier levels.
What can shoppers do when food prices rise? First, be flexible and reconsider your menu. Not all food prices rise at the same time and typically some fall while others are rising. Shopping the price specials and using coupons also helps hold down food bills, although this takes some time and effort. Fresh foods are often cheaper and healthier than highly processed foods, even though they may take more preparation time than ready-to-eat foods. Grocery stores differ in their prices and service offerings, so shop around. Home gardening and food processing is often as much a form of recreation as cost savings, but it can lower food bills. Consider shopping at farmers’ markets for fresh, locally produced products.
Despite this year’s food price rises, the average household’s food bill is expected to average only about 10 percent of their take-home pay. Not bad and a testimony to the incredible efficiency and effort of those million of farmers, food marketing managers and personnel who each year bring us our daily bread at a reasonable cost–despite weather, disease, and other challenges to our food supply.
Author’s Note: After writing this food price report for the past 35 years, this is my last issue before retiring. I appreciate all of you who have used this report in your work and new stories. It has been a pleasure to work with you.
J. N. Uhl, Food Marketing Economist
Department of Agricultural Economics
Purdue University
uhl@purdue.edu
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