What’s Driving Farm and Retail Food Prices?

For each dollar a consumer spends at the supermarket, that entire dollar does not go directly to a farmer. Soybeans, corn, wheat, rice and other raw commodity inputs move along the food supply chain from farms to collection and storage facilities and then processors. The commodities pass on to wholesalers, and once processed and packaged, they move to the retail market. Along the way additional costs are layered on top of the price received by the farmer. These are composed of marketing costs from handling, sorting, cleaning, processing and packaging a product. The costs also include product transportation and storage charges and expenses related to the insuring, financing and retailing of that product, including store maintenance and utilities, refrigeration, labeling and shelf display and advertising and promotional costs.

Proceeds from each food dollar expenditure are divided into two subcomponents of market value: farm share and the marketing bill. Farm share measures the proceeds of farm commodity sales tied to a food-dollar expenditure and sold to nonfarm establishments. In economics, the marketing bill is a term used to describe the market value added to farm commodities embodied in a food-dollar expenditure and is measured as $1 minus the farm share. For calendar year 2019, the farm share was 14.3 cents of each food-dollar expenditure, and the marketing bill was 85.7 cents, accounting for the remainder of the food dollar.

The COVID-19 pandemic led to a shift in consumer demand from food consumed away from home toward food consumed at home. As this shift was occurring, retail food demand soared. Although similar food products are consumed in and out of the home, products normally sold to restaurants and food service operations cannot be sold to retailers without incurring additional production costs.

The U.S. Department of Agriculture estimates prices for food for at-home consumption are expected to increase between 3% and 4%, while prices for food purchased away from home are predicted to increase between 5% and 6%. Impacts from the conflict in Ukraine and the recent increase in interest rates by the Federal Reserve are expected to put pressure on food prices.

Retail food prices partially reflect farm-level commodity prices, but packaging, processing, transportation and other marketing costs, along with competitive factors, play an integral role in determining prices on supermarket shelves and restaurant menus. Retail food prices are less volatile than farm prices. Retail food prices increased by 3.5% in 2021, equal to the rate in 2020 and greater than the 2000 to 2019 historical annual average of 2%. Inflationary pressures differ by food category. Food price increases in 2020 were primarily a result of shifts in consumption patterns and supply chain disruptions related to COVID-19.

For instance, meat prices have increased due to strong demand, higher feed costs and supply chain disruption. Winter storms and drought affected meat prices in the spring. Forecasts for U.S. farm income in 2022 expect reduced margins due to retreating commodity prices and rising input costs. Crop prices are projected to decline from 2021-22 peaks to levels more consistent with pre-COVID-19 prices. In 2021, commodities such as corn, soybeans and cotton rose to record high levels amid soaring export demand and strong domestic demand and tight stock availability. The economic outlook for rice is forecast to improve in 2022. Favorable production conditions for sugarcane and sugar beets in 2021-22 have been met with stable sugar prices in the market.

Prices for inputs, such as fertilizer, have significantly increased year-over-year, as supply chain disruptions, energy price hikes and geopolitical tensions threaten to keep prices elevated. Freight transport disruptions have affected supply chains, and bottlenecks in ports from longshoremen and truck driver labor shortages have hampered the throughput of agricultural goods. This has affected both retail food prices and the availability and price of raw ingredients, such as proteins primarily used in animal feed and chemicals used to control weeds in row crops. Producers are also finding it difficult to find repair parts for machinery.

The USDA points to a number of factors over the last 18 months that sent global agricultural commodity prices to near-record levels. Russia’s invasion of Ukraine was only the latest development to push commodity prices higher. Other factors affecting global markets, which date back to late 2020, include increased global demand led by China; drought-reduced supplies; tightening wheat, corn and soybean stocks in major exporting countries; high energy prices pushing up the costs of fertilizer, transportation and agricultural production; and countries imposing export bans and restrictions, further tightening supplies. In summary, as agricultural goods leave the farm gate, extraneous factors can affect retail prices paid by the consumer. When combined with retail challenges and macroeconomic conditions, such as inflation, it should be borne in mind that farmers are not able to benefit directly from downstream price increases.

Michael Deliberto is an assistant professor in the LSU Department of Agricultural Economics and Agribusiness.

(This article appears in the spring 2022 issue of Louisiana Agriculture magazine.)

6/17/2022 9:19:18 PM
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