During the Food Price Outlook section of the U.S. Department of Agriculture’s Agricultural Outlook Forum in February, three speakers gave their thoughts about current and forecast trends in both retail and wholesale food markets.
Carolyn Chelius, agricultural economist, with ERS discussed the food price outlook, while Andy Harig, vice president of tax, trade, sustainability and policy development at the Food Marketing Institute detailed the shifting preferences of the American consumer and where they’re spending their dollars. American Farm Bureau Chief Economist John Newton detailed the future of the food industry from the perspective of the farm sector.
Chelius said on average United States consumers spend around 13% of their expenditures on food, and according to the Bureau of Labor Statistics, on average people spend more on food than healthcare, entertainment or education.
With lower income consumers, a larger percentage of their expenditures are on food compared to their total income.
“Higher income consumers tend to spend a lower percentage of their total income on food,” Chelius said.
It’s helpful to understand food price inflation in the context of economy-wide inflation. Inflation for major categories in the economy from 2016 to 2020 has mirrored the same percentage of all items of inflation.
Food price inflation in 2020 was higher than average, which brought up the average over the last five years.
“So for example, food price inflation has been lower than the price inflation for medical care and for housing, but higher than the price inflation for other categories such as recreation and apparel,” she said.
When looking at food price inflation it is important to review the consumer price index for all food.
“CPI looks at prices for a specific set of grocery store foods and beverages bought in cities around the country and compares the price of this market basket or indexes it to 1982 to 1984 prices,” she said. “Food prices make up 14.1% of the all items CPI.”
In the CPI, all food is broken down into two categories—food at home and food away from home, Chelius said. And the food price inflation for food away from home and food at home from 1990 onward largely mirrored each other until about 2009, when those rates of price inflation started to diverge.
“So food away from home price inflation has continued to steadily increase at around the same rate,” she said. “But food at home prices have leveled off a bit and really diverged from the rate at which food away from home was increasing.”
Another way to look at this is to look at the actual rate of inflation for food at home and food away from home.
“One of the things that’s not very helpful about the CPI is that CPIs are indexed to themselves and their own prices,” she said. “It’s not actually possible to compare an actual CPI to another CPI. However you can compare the rate of change from one CPI category to another.”
Food at home has experienced some price deflation over the past 50 plus years, and food away from home has consistently increased in price each year—particularly over the last few years.
“Food at home prices on average have increased at higher rates than food away from home prices,” she said. “So for example, in 2019, food at home prices increased 2.9%, whereas food away from home prices increased 3.1%.”
Chelius said the most interesting thing about 2020 is how different the story looks. Food at home prices increased 3.5% from 2019 to 2020, while food away from home prices increased 3.4%.
She is expecting there will still be some food price increases—albeit not at the level of historical inflation—which for food at home is 2%. She doesn’t see the same magnitude of price spikes from March 2020 from December 2020 for different food categories, but for categories like pork and poultry she sees small increases in price.
As a reminder, 2020 was the year of high food price inflation—some 75% above the 20-year historical average.
Harig said one challenge that COVID has placed on him and FMI is it has blown up much of the data he traditionally collects, and has led to changes in the consumer area that are both unexpected. He’s also uncertain of how long it’s going to last.
For the past year, he’s been trying to understand the way consumers have changed their behavior and where it might be headed.
“Obviously COVID-19 was a huge shock to the system. Few of us could have expected it,” he said. “And I think few of us could have figured out quite how broadly, its impact would be felt.”
Harig said for the food industry, the most important factor driving the changes caused by COVID is really the loss of the food service sector and shift of food consumed at home prior to February 2020.
“When we started to see COVID spread about 53% of household food spending was directed on food away from home,” he said. “That includes restaurants, but also areas like school cafeterias.”
By April 2020 the food consumed away from the home had dropped to 34% from the 53%.
“That is obviously a huge drop in an incredibly short period of time, and represents about an additional $23 billion spending directed towards grocery stores and supermarkets and convenience stores,” Harig said. “That meant not only higher volumes of shoppers in the stores. So bigger numbers, bigger crowds, but also much bigger per trip spent.”
That became one more challenge for grocers as they were trying to meet this demand. Food service and food retail segments had to find their own way as well.
Things like personal protective equipment, cleaning and sanitation, and labor cost made it challenging. With PPE, a business could be operating on different guidance based on recommendations from varying sources.
Prior to the pandemic, grocers didn’t want customers coming in and smelling bleach or other kinds of different disinfectants.
“You want them coming in and smelling the rotisserie chickens, the bread being baked in the bakery and those kinds of things that really entice people to eat,” Harig said.
But the pandemic turned that and they way consumers shop on their heads.
Harig said one of the top changes to eating habits due to COVID was cooking more meals. It’s not only prepared foods and pre-prepared dishes, it’s people cooking from scratch.
“Which we thought was really interesting that people are doing this,” he said. “I think a really interesting dynamic, they’re talking about planning more meals in advance, trying new dishes more often being more adventurous.”
Newton said the pandemic’s impact on the agricultural commodity prices was swift and immediate.
“We saw corn prices fall pretty dramatically,” he said. “If you think about why would corn prices fall—ethanol demand fell because gasoline prices were low people weren’t driving.”
Milk used for butter and powder fell by more than $6 per hundredweight. Ethanol declined by nearly $0.50 a gallon.
“The impact on agriculture from COVID-19 hit just about every single sector from our fruit and vegetable growers, horticulture nurseries, aquaculture, as well as your traditional row crops and major livestock sectors, Newton said.
There was a pretty dramatic shift in consumption patterns since over time Americans have gradually spent more and more of their money on food purchases away from home. Due to COVID-19 a lot of that money went into the grocery channel.
There’s been recovery in recent months, but the issuance of more lockdown orders, it has lead to stalled recovery in the restaurant channel. Census Bureau data in December indicated food service and drinking establishment sales were 22% below prior year levels. By April they were down 50% compared to prior levels.
In the long run, farmers and ranchers and the food industry need to think about how to do things better following the pandemic.
“One of the other major challenges that we’re going to have to discuss as we get past the coronavirus is really looking at our supply chains,” Newton said. “During the spring, we had major disruptions in our beef processing, our pork processing, and in our poultry processing.”
At one point beef production was down more than 30% compared to prior levels, same with pork. But how do the supply chains become more flexible and nimble?
In order to make it more nimble there needs to be idle processing capacity somewhere in the supply chain. The efficiency associated with that idle capacity is something to be analyzed.
“There has to be a willingness to pay the idle processing capacity,” Newton said. “It has to be paid for higher prices for your agricultural products or food products that you consume.”
Another avenue that could be explored given the food price out look is what the implications are for the farm bill and for the public sector to share in these additional costs to achieve climate goals.
“I think two of the things that will most likely impact food prices in the long run would be that our efforts to move to a net zero economy will increase costs in the supply chain,” he said. “As well as our efforts for a more nimble supply chain, the idle processing capacity that that entails is also likely to increase cost.”
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