Food Price Inflation: Not Unprecedented but Definitely Unusual

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Food price inflation is outpacing inflation in the rest of the economy. The last time U.S. consumers saw food prices rise at this level was the late 1970s, Jayson Lusk, agricultural economist at Purdue University, explained during the keynote address at the Midwest Pork Conference in Lebanon, Ind., on Dec. 6.

“We aren’t in uncharted territory, but we are certainly in very unusual times in how we’re experiencing the economy,” Lusk said.

When asked if consumers are experiencing stress in their budget, Lusk said a recent survey showed almost everybody said ‘yes’ and food is at the top of the list of items in the household budget that are creating the most stress.

What’s Changed Since 2020?

“The overall rate of inflation in the economy has been about 15.2%. Food inflation has been up 22.5%. All meat inflation is up over 25%. If you think about the consumer’s experience with shopping behavior, meat has gotten much more expensive for a lot of consumers relative to food and relative to other prices in the economy,” he said. 

Pork production now is also below where we were in January 2020, he added, with less pork on the market. And he expects this to be a similar story in 2023. 

From a retail protein price standpoint, pork has experienced a 31.5% increase from January 2020 to October 2022. To put that in perspective, that’s from $3.84/pound to $5.05/pound. 

Lusk said the three main food price drivers are macroeconomic events (money supply), demand (real income changes, relative price changes and trade) and supply (weather, war, disease, input costs). 

1.    Macroeconomic Events

The U.S. is experiencing general macroeconomic factors that we can’t do anything about, he explained. There’s more money in the economy post-pandemic due to stimulus checks, unemployment benefits and SNAP benefits. In short, there’s too many dollars chasing too few goods. 

2.    Demand 

Real pork prices increased 14.2% during this time period, Lusk said. Meanwhile, pork production dropped about 4.2% in 2022 relative to 2020. In the midst of this all, consumer willingness to pay for pork increased 7.8%. 

This increase in willingness to pay led to a 6.4% real retail price increase (of the 14% increase, about 6% was due to demand),” Lusk said. “People want more pork and are willing to pay for it.”

Consumers’ response to inflation may finally be changing their food purchasing behavior, Lusk noted. In January, surveys showed consumers had little or no change to purchasing behavior due to inflation. The most recent surveys show consumers are now looking for sales and discounts using coupons and/or switching to generic labels.

“I think there has been a shift in consumers’ mindsets that kind of correlate to that change in savings rates – that people are starting to be a little bit more price sensitive, starting to cut back a little bit and that might explain some of the downward pressure we've seen in retail pork prices in the last month or two,” Lusk said. 

3.    Supply

One of the reason retail prices are higher is because it’s more costly to produce pork today. Lusk estimates marginal costs have increased about 40% since January 2020. Cost increases have probably pushed up retail prices almost 8%.

Those costs won’t surprise anyone in the room, he said. Feed prices– corn, soybeans, wheat– have more than doubled at times since January 2020. Although prices have come back down in recent months, he noted it’s still pretty high compared to where the industry was a couple years ago. 

“But it’s not all doom and gloom. If you look at the USDA’s forecast of net farm income, probably our best broad-based measure of farm profitability, is projected to rise again and be as high as it's been,” Lusk said. 

How Connected are Retail Prices to the Farm?

It’s important for producers to keep in the back of their mind that for every dollar a consumer spends on food, a very small share of that is because of what happened at the farm, Lusk pointed out. If you look at the price of hogs at the farm level, that’s about 25% of the retail food price. A reduction in farm-level prices does have an impact on that retail food consumer, but it's muted.

“It gets muted by increasing energy prices or falling energy prices, changes in transportation or wage rates at the grocery sector, all those things are also going to have a big impact cumulatively more than what happens at the farm level,” Lusk said.


How much do changes in commodity prices affect retail food prices?

  • Farm hog price is about 25% of retail pork price
  • Wholesale pork price is about 44% of retail pork price

More from Farm Journal's PORK:

The Wild Wild West of Carbon Markets: Where Do Swine Genetics Fit?

Colombia and Chile Offer Untapped Potential for U.S. Pork Industry

 

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