After posting its largest increase since 1991 in 2007, the United States consumer price index (CPI) for food registered an even larger increase in 2008.
But as food commodity prices and other costs associated with the marketing of food products weaken, food price inflation will return to more historical levels, according to the latest 10-year baseline projections from the University of Missouri's Food & Agricultural Policy Research Institute (FAPRI).
- Consumer food prices not falling with commodity prices.
- Production cutbacks will eventually take prices higher.
- What sent farm, food prices up is now bringing them down.
A retreat of commodity prices in the second half of 2008 has helped slow the monthly rate of food price inflation (Figure 1).
Pat Westhoff, co-author of the projections and grain and policy analyst, said the 5.5pc food price inflation of last year has retreated and now is estimated to be 2.7pc for 2009.
Monthly food price inflation is very volatile and was generally quite high in the spring and summer of 2008.
Now, commodity prices have retreated 50pc after a downturn in the US and global economies resulted in weaker food demand and lower prices for food and other commodities.
Bill Lapp, president of Advanced Economic Solutions, explained that for the first time in January and February, the CPI exceeded the producer price index on a year-over-year basis.
Normally, the CPI increases more rapidly than the producer index.
"We finally got to a point where CPI caught up in January compared to a year ago," Mr Lapp said.
"Some products are catching up more quickly.
"Grain and vegetable oil-based products had big increases on the consumer price side during 2008; that may be closer to being back to normal."
Price drops lag
Westhoff said although the inflation rate is slowing, food prices aren't falling.
"In most circumstances, not all of the additional costs were passed on to consumers in 2008," he said.
Approximately 20pc of the cost of food is generated by the farm value of the food itself, with the remainder due to other costs in the food marketing chain.
FAPRI said retailers prefer to avoid volatile food pricing strategies, so although factors determining the consumer cost of food can quickly vary, price "stickiness" at the retail level helps moderate that volatility (Figure 2).
IHS Global Insight is projecting that labour, energy and other costs that comprise the food marketing cost index will grow more slowly in the next decade.
Food companies say they are still coping with rising prices themselves as last year they locked in commodity prices - some until this summer - and although commodity prices have fallen, they still remain above historical levels.
Analysts expect food manufacturers to eventually moderately lower prices as shoppers turn to more store brands or shopping at discount stores such as Wal-Mart.
In response to weaker demand and higher input costs, many agricultural sectors are cutting back on production.
The effects of supply and demand will provide lower prices for a period, but as the two come into balance, prices will go higher.
Through 2009 and beyond, the downward production will bring higher prices, Mr Lapp said.
Scott Brown, FAPRI's analyst on livestock and dairy, said historically low dairy commodity prices could create cheaper dairy prices at US supermarkets this year.
On the meat side, production is already declining alongside lower consumption.
"Demand is down for everything. In particular, demand is down more for meat products, which means less demand for the corn and soybean meal to produce meat. It filters through the system," Purdue University agricultural economist Wally Tyner said.
"It takes a long time for some animal livestock products before those lower commodity prices get filtered into the meat, dairy and eggs.
"Poultry products are the quickest. For beef, it's the longest time period - up to several years - and for pork, it's somewhere in between.
"For some meat products, we may be seeing prices now that reflect more what corn and soybean prices were last year than what they are this year."
Food price drivers
Agricultural commodity and crude oil prices rose to record levels in 2008. Now, in a 180-degree turn, the same factors that took prices to new highs have helped moderate prices.
A new Farm Foundation report, What's Driving Food Prices? March 2009 Update, builds on the analysis Purdue University economists Phil Abbott, Chris Hurt and Tyner did for Farm Foundation just nine months ago titled, What's Driving Food Prices? (Feedstuffs, Aug. 4, 2008). That report identified three major forces driving food prices:
- World agricultural commodity consumption is exceeding production growth, leading to very low commodity inventories;
- A decline in value of the U.S. dollar, and
- The new link between energy and agricultural markets.
In the second half of 2008, each of these driving forces reversed direction.
A world financial crisis put the brakes on world income growth.
Global crop production returned to more favorable levels for both the 2007-08 and 2008-09 crops as production area and yields both increased.
After July 2008, the exchange rate of the US dollar appreciated against major currencies.
Energy prices collapsed, influenced by changes in income and exchange rates.
Lower energy prices constrained the profitability of ethanol, contributing to weaker commodity prices.
"Whether the future takes prices up or down depends on many unknowns - not the least of which are the depth and recovery characteristics of the current global financial crisis and recession," Mr Tyner said.
Other unknowns include the potential for inflation and its possible influence on commodity prices, the direction of the US dollar exchange rate and the price of crude oil and agricultural commodities.
"The future for agriculture is also closely tied to the depth and duration of the current recession, as well as to the magnitude of the recovery in coming years. Other important factors will be how governments and consumers respond to the downturn and how biofuels policy evolves in coming years."
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