From Farm to Table: Why Food Costs So Damn Much
A new report issued by the Labor Department indicates that Americans should be prepared for food prices to remain relatively high throughout the holiday season. The Bureau of Labor Statistics’ Consumer Price Index, a key measure of inflation and deflation, indicated a 0.3 percent rise in September, after increasing 0.2 percent in August.
Meats, particularly beef, are among the food items which saw the steepest rise in price, with beef and veal rising 16.7 percent since January of 2014. That news may well be disheartening for many Americans, given that roast beef and turkey often feature prominently on holiday tables. Overall, the USDA report indicates, food prices have increased fairly steadily throughout the past decade, and are only just beginning to stabilize; all in all, the food index has risen about 3 percent since 2008.
Dairy products were another category that saw an unusual increase in price compared with other categories; spending on dairy products, the report indicates, rose 4.9 percent from 2013, and .5 percent from August to September, and the ERS expects prices to continue to rise throughout the remainder of 2014 and throughout 2015. The only staple food items which saw slightly declining prices were cereals and bakery products, which descended a mere 0.1 percent.
With food prices continuing to a be a source of stress for Americans, many of whom are still struggling amidst a painfully slow-to-recover economic climate, it’s important to understand where the price increases are coming from, and what they mean for the average American consumer. We break down the pressures affecting your food prices, starting at the source, all the way to your table.
A global issue
According to the World Bank, the rise in food prices is hardly an isolated event; worldwide, internationally traded food prices rose by a steep 4.0 percent. Corn and wheat, in particular, contributed to the rise; the commodities each increased 12 percent and 18 percent worldwide this year, respectively. Economists say that the increases come despite bumper crops in 2013 and “continued projections of record grain harvests and stronger stocks expected for 2014,” according to Business Insider.
This sizable shift in food prices is worrying as it recalls the food crises days of 2012, though the numbers are still a far cry from the shortages experienced in that year, or in past food crises, such as the one which occurred in 2008. Regardless, the World Bank cautions that “such a steep price increase has not occurred since the months leading to the historical peak in the summer of 2012,” according to a recent report.
“Average consumers will have no cause to consider inflation rampant,” economist Chris Christopher, an economist with the research firm IHS Global Insight noted in a recent analysis of the government’s latest inflation numbers, per CBS, though he notes that, “living standards will suffer as a larger percentage of household budgets are spent on grocery store bills, leaving less for discretionary spending.”
The World Bank notes that already high food prices have become “the new normal,” and writes that, in less developed nations families cope with rising prices by “pulling their children out of school and eating cheaper less nutritious food, which can have severe life-long effects…one-third of all child deaths globally are attributed to under-nutrition.”
According to the FAO, food prices have declined over the past few years but are well above the average price level between 1985 and 2005.
Rising demand
According to the Bureau of Labor Statistics, the average American spends about 10 percent of their annual income on food. That might seem high, but most other countries spend more; the average citizen in Indonesia, for instance, spends approximately 43 percent of their income on food. In Azerbaijan, that percentage rises to almost half of the average Azerbaijani’s take-home pay, according to the USDA Economic Research Service’s Food Expenditures report.
Christopher Barrett, a professor of agriculture at Cornell University, says that part of the reason for the rising cost of perishable food items has to do with a larger, global trend — the trend of the growing, global, middle class as more and more people are demanding fresh, high quality produce and meat.
Now the idea of a “growing middle class,” might seem strange to those of us in North America who have been reading for years now about the “crumbling of the middle class,” but in developing nations, the middle class is growing, and rapidly.
“Simpler products,” Barrett asserts, in an interview with International Business Times, “don’t enjoy the same robust relationship to income growth that perishable products do. As populations move from rural areas to urban areas they still want those fresh, perishable products, and in urban areas they have a more extensive marketing chain,” he adds.
Dr. Milt McGiffen, vice chair of the Department of Botany and Plant Sciences at the University of California Riverside agrees. He says it’s natural for price pressures to be “more acute for certain commodities in certain moments,” though he adds that he sees the trend of rising prices on perishable goods continuing upwards due to “global factors.”
HOLTVILLE, CA – OCTOBER 08: Mexican agricultural workers cultivate romaine lettuce on a farm on October 8, 2013 in Holtville, California. Thousands of Mexican workers cross the border legally each night from Mexicali, Mexico into Calexico, CA, where they pick up work as agricultural day laborers in California’s fertile Imperial Valley. Although the Imperial Valley, irrigated from water diverted from the Colorado River, is one of the most productive agricultural areas in the United States, it has one of the highest unemployment rates in California, at more than 25 percent. Mexican farm workers commute each day from Mexicali to work in the fields for about $9 an hour, which many local U.S. residents shun as too low pay. (Photo by John Moore/Getty Images)
Price pressures, on the farm
Food price spikes don’t just come out of nowhere; often, rising food prices can be traced back to the farm, where weather and other conditions that can be difficult to regulate can also have a dramatic affect on consumers. Here are the agricultural issues which economists believe are most affecting rising food prices today.
Worker shortage
California, and more specifically, the state’s Central Valley, is home to more illegal immigrants than almost anywhere else in the U.S., with an estimated 2.5 million immigrants calling the Golden State home. Most of these immigrants are farmworkers, and, whatever you feel about immigration policy, these workers are, without a doubt, the backbone of California’s agricultural industry. In the Central Valley and other agricultural hotspots throughout the state, shortages of farmworkers are a major problem exacerbating already dwindling productivity..
A March, 2014 report released by the Partnership for a New American Economy and the Agriculture Coalition for Immigration Reform found that “labor challenges faced by U.S. farmers and the inadequacies of the H2-A visa program are a key reason why American farmers have been unable to maintain their share of the domestic market. Labor alone can explain as much as $3.3 billion in missed GDP growth in 2012,” the report reads, adding that labor shortages have resulted in $1.4 billion in unrealized farm income for 2014 alone.
Timothy Richards, a professor of agribusiness at Arizona State University adds that labor shortages work in tandem with other factors to create a difficult environment for farming. “It’s like a perfect storm,” he said, per CNBC. “We don’t have enough water or enough workers to pick crops. So much food is left in the fields. It’s just adding to the woes.”
SALEM, SD – OCTOBER 02: Dave Fendrich (walking) helps Bryant Hofer (in combine) harvest a field of corn on October 2, 2013 near Salem, South Dakota. During last year’s drought Hofer averaged about 85 bushels of corn per acre. Although he has just started to harvest his fields, this year Bryants corn has averaged 180 bushels-per-acre. According to the Commerce Department, farm earnings nationwide were down 14.6% during the second quarter of the year. Many Midwest states, which are rebounding from last year’s severe drought, reported some of the biggest drops. (Photo by Scott Olson/Getty Images)
Drought
A report published earlier this spring from CNBC asserts that rising food prices this year are due in part to droughts rampant throughout California, a state which, while perhaps not known primarily for its agricultural economy, produces roughly half of the nation’s fruits and vegetables. According to the USDA this year’s drought in California marks the driest year on record for the state and predicts that conditions are likely to affect the state’s agricultural production throughout 2014 and beyond.
Already many farmers, both of livestock and of fruits, vegetables and nuts, have had to leave fields fallow, or cull animals due to water shortages. The USDA notes that because long-term moisture deficits remain at near-record levels in California, it remains difficult to determine how long the drought will continue. The USDA Drought Monitor notes that 55 percent of the state is still suffering from “exceptional drought,” the highest level of drought on the scale.
The ERS cautions that ongoing droughts throughout Texas and California are likely to continue to hinder meat production, meaning that meat prices will remain high throughout 2015, and could be driven still higher. Further, the effects of California’s drought on fruit, vegetable, and egg production is still yet to be fully realized, and the ERS notes that the drought could have a “large and lasting” effect on prices for those products.
Further, drought hasn’t just been a domestic issue; food price spikes have been driven by a combination of “weather and politics” according to CBS News, and while California’s drought this year is “record-setting,” it’s accompanied by droughts in other important agricultural areas worldwide, including Brazil, Mexico and West Africa.
BAKERSFIELD, CA – FEBRUARY 6: A dog hangs around an abandoned farmhouse on February 6, 2014 near Bakersfield, California. Now in its third straight year of unprecedented drought, California is experiencing its driest year on record, dating back 119 years and possible the worst in the past 500 years. Grasslands that support cattle have dried up, forcing ranchers to feed them expensive supplemental hay to keep them from starving or to sell at least some of their herds, and farmers are struggling with diminishing crop water and whether to plant or to tear out permanent crops which use water year-round like almond trees. About 17 rural communities could run out of drinking water within several weeks and politicians are pushing to undo laws that protect several endangered species. (Photo by David McNew/Getty Images)
Climate change
That climate change is becoming a major factor affecting food prices can hardly be denied any longer. Climate change, scientists say, has caused an uptick in both the frequency and severity of droughts, which mean farmers in drier agricultural zones, like California, must increasingly make tough choices regarding which of their crops and livestock they choose to water.
According to a report published by the UN panel on climate change, “observed impacts of climate change have already affected agriculture, human health, ecosystems on land and in the oceans, water supplies, and some people’s livelihoods,” adding that, “all aspects of food security are potentially affected by climate change, including food access, utilization, and price stability.” Further, the UN has found evidence that in some parts of the world climate change has already begun to limit access to food due to price increases. The report found, for instance, that “there have been several periods of rapid food and cereal price increases following climate extremes in key producing regions.”
The report continues, noting that if worldwide temperatures continue to rise, “models based on current agricultural systems suggest large negatives impacts on agricultural productivity and substantial risks to global food production and security.”
Shifting temperatures and rainfall are particularly damaging, the report notes, with experts estimating that food prices will increase somewhere between 3 and 84 percent by 2050. “Climate change is acting as a brake,” added Michael Oppenheimer, a Princeton professor who also helped write the UN report. “We need yields to grow to meet growing demand, but already climate change is slowing those yields.”
In a report on global food security the World Bank notes that the world will need to produce 50 percent more food if it is to feed 9 billion people by 2050, but if climate change continues to worsen, it could potentially cut yields by as much as 25 percent or more.
Price pressures from industry consolidation
Perhaps the largest price pressure stemming from the processors and packagers (the intermediaries) in our food system is consolidation; that is, mergers and acquisitions. As we reported previously, Big Food’s consolidation often indirectly spells higher food prices as a result of a lack of competition in the marketplace. It’s predicted that the consolidation process will increase food prices, particularly in the meat processing and packaging industry; USA Today reported earlier this month that beef and veal prices are expected to rise 6 percent in the next few months, and around 3.5 percent this year overall.
Doug Sheehan, a financial advisor and president of ICCF Wealth Management, noted that as the food industry continues to consolidate, consumers are likely to see higher and higher prices, though farmers are also likely to feel the sting of the recent movement toward consolidation. “It’s bad anytime you have competitors going away,” Sheehan told CNBC. “There will be less incentive to lower prices in stores, and that can be harmful all around.”
According to a 2007 study by the University of Missouri, “the four largest companies controlled 82 percent of the beef packing industry, 85 percent of soybean processing, 63 percent of pork packing, and 53 percent of broiler chicken processing. In fact, so much consolidation has taken place throughout the food chain that it can be difficult for any one person to fathom the true effects.”
The trend towards rising food prices continues at the supermarkets, particularly as the grocery industry, like Big Food, consolidates still further. Supermarket chains often claim that mergers help keep costs low for consumers, but the opposite is generally closer to the truth, according to industry watchdog Food & Water Watch.
“The grocery industry justifies the size of big-box and merging grocery chains as a way to increase efficiency, lower costs, and pass savings on to consumers. But most supermarkets just pocket any savings in the form of higher profits, while consumers rarely benefit. The dominant supermarkets can charge consumers considerably more than it costs to put groceries on store shelves, and they have little incentive to pass price discounts on to consumers if they have few or no competitors in a local market,” Food & Water Watch reports.
There are a number of other factors influencing the prices at your supermarket as well, particularly oil, which we’ll discuss next.
Price pressures from oil
Much of the nation’s food is shipped hundreds or even thousands of miles before it reaches your local supermarket, thus the cost of transportation much be accounted for. When oil prices are high, chances are your food prices will see a rise as well, particularly if those higher oil prices come during a drought year, when production in the fields is lower than usual, as is the case this year. Since the average American meal travels 1,500 miles from the farm to the consumer’s plate, oil is a crucial, if not on of the most salient price pressures affecting Americans’ wallets at the supermarket. As oil continues to be an issue, Americans can expect foods which must be sourced from further away, (avocados, for instance, if you live in the Northeast) to see more dramatic price increases.
USA Today reported earlier this month that increasing tensions in the Iraq oil region have caused crude oil prices to reach a ten-month high; the news source cautions that gas prices may increase still further over the summer, though experts say it’s not likely to be a sudden, dramatic rise as has been the case in years past. “We’re not looking at a Gas-zilla event; it’ll probably be a slow drift higher rather than skyrocketing,” Tom Kloza, a senior energy analyst at gasbuddy.com said.
Why meat prices are in focus
Meat is one of the most energy-intensive foods to produce; according to the EPA, 1 pound of beef demands nearly 1,800 gallons of water, not to mention the cost and added energy associated with moving, slaughtering, butchering and processing that meat. Because of the energy involved, it seems natural that meat is more easily affected by other contributing price pressures (drought, oil, etc.) than say, broccoli or kale.
All of that energy means that meat is often one of the most expensive foods you can put on your plate, and it’s getting still pricier. According to a report from the Bureau of Labor Statistics, the average retail price for uncooked beef steak reached a record high this past August, when it hit $7.36 per pound. It’s not just steak, either; hamburger meat has gone up too. According to the BLS, a pound of hamburger has risen 13.1 percent year since last year, and beef roast has risen by more than 17 percent.
A report from the USDA, however, suggest that despite price hikes and a trend toward healthier eating in which meat is often demonized, American meat consumption is at a “record high.” The report notes that in 2000, the average American consumed 195 pounds of meat in a year (including red meat, poultry and fish), which approximately 57 pounds more than the average American consumed in the 1950s.
The most recent reports, however, do note a trend toward declining meat consumption, namely due to the recent food crises since 2000, in addition to the recent recession and slowly recovering economy.
More from Wall St. Cheat Sheet:
- Big Food’s M&A Craze Comes at a High Price: What Investors Should Know
- Instagram Inspiration: 10 Best Accounts for Food and Fitness
- Falling Behind? 8 States With the Slowest Economies
Want more great content like this? Sign up here to receive the best of Cheat Sheet delivered daily. No spam; just tailored content straight to your inbox.