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CCFB News» April 2023

Special Report: Food PricesStill on the Rise

 

USDA: Food costs to remain on upward trajectory

 

Food costs will continue to eat away at consumers’ pocketbooks this year. USDA estimates food price inflation could increase another 8% this year after racing to its highest level last year (9.9%) since 1979. Grocery purchases, or food at home, could experience the highest inflation this year at 8.6%, down from 11.4% in 2022. Meanwhile, prices of food away from home could increase 8.3% in 2023, up from 7.7% last year.

 

The higher prices will continue to affect pretty much anything shoppers put in their carts or order out. No segment of the food market will be spared from historically high inflation again this year, according to USDA. After posting some of the highest price increases in 2020-21, inflation for beef/veal and pork eased to 5.3% last year. Egg prices posted the highest gain at 32% in 2022. Even with the higher costs, food expenditures remain about the same portion of spending (12%) for U.S. consumers compared to other years when food prices increased closer to the historical rate around 2%.

 

The average weekly grocery scan of food purchases increased from an average of $121 in February 2020 to $151 last month. The average grocery purchase peaked at $161 per week at the beginning of the pandemic as many consumers went through a “stockpile” phase. Consumers are also cutting back on total purchases to deal with inflation.

 

A recent survey found 59% of consumers are currently shopping for more deals, 45% are buying more store brands and 41% are buying fewer items overall.

 

Higher prices actually erode margins for food retailers, whose profit margins hover around 2-3%.

 

Economists crack egg price controversy 

 

The fact that egg prices are historically high isn’t exactly “breaking” news. Prices for eggs increased another 8.2% in January and are up nearly 70% compared to the same time last year at a record $4.82 per dozen.

 

 

So, what’s driving the massive spike in egg prices, which are well above the overall rate of food price inflation? The cost of all food was up an average of 10.1% in January from a year ago.

 

All kinds of theories have been hatched — from collusion by food companies to production problems with hens. Some even suspect sabotage, after fires killed 100,000 hens on a Connecticut farm and about 50,000 birds on a New Zealand farm.

 

But while many factors are at play in the runup of egg prices, ag economists said the situation basically boils down to two key points — supply and demand. The U.S. poultry flock was hit hard by losses to highly pathogenic avian influenza (HPAI) at a time when egg demand remains high.

 

Nearly 58 million birds have been lost as a result of HPAI since last year, making it the deadliest such outbreak on record.

 

Meanwhile, chicken eggs still averaged 190% of poultry sales in 2021-22, while broiler chickens averaged 68% and turkeys just 13% of poultry sales, illustrating a continuation of strong egg demand.

 

Eggs are not only a key source of protein, but they’re also considered a “healthy food” rich in vitamin D and essential fatty acids, according to a new proposed definition by the U.S. Food and Drug Administration. The proposed definition aligns with current scientific research and 2020 dietary guidelines, according to the American Egg Board. After decades of research, data shows no link between egg consumption and cholesterol levels.

 

With healthiness and affordability driving egg demand, the average price of a dozen Grade A eggs more than doubled to $4.25 per dozen by the end of last year.

 

While HPAI wiped out millions of hens, the egg-laying flock was still down just about 5% from its normal size at 320 million as of December, following a 13.6% reduction. The egg supply subsequently was down 6.6% for the year.

 

So, why did egg prices increase more than 60%? The answer is that egg demand is inelastic. There aren’t good substitutes for eggs, and as such, consumers continue buying eggs even when prices rise. 

 

Meat, dairy demand remains strong amid price volatility 

 

The high food price environment forced many consumers to reevaluate their spending in recent years. But it hasn’t chased them from the meat or dairy aisle. Sales of red meat, poultry and dairy products remain strong as consumers around the world look to get the most nutrition out of each food dollar, according to industry experts.

 

USDA predicts the all-milk price could decline from an average of $25.55 per hundredweight in 2022 to $21.60 this year. (Photo by Catrina Rawson)

 

In fact, U.S. beef and dairy exports set new records in 2022 while pork exports were the third-largest on record, according to the U.S. Meat Export Federation (USMEF) and U.S. Dairy Export Council. Beef exports set records for both volume (1.47 million metric tons) and value ($11.68 billion) in 2022, up nearly 40% from the five-year average. Meanwhile, U.S. dairy exports surged to a record $9.6 billion last year. Cheese sales alone nearly topped 1 billion pounds.

 

USDA predicts the all-milk price could decline from an average of $25.55 per hundredweight in 2022 to $21.60 this year, which could ease inflationary pressure on dairy items. But, lower milk prices could also result in a smaller dairy herd.

 

 

Dairy cow slaughter was up 8% during a recent four-week stretch, according to the CME Group’s Daily Livestock Report.

 

As for U.S. pork exports, sales reached 2.67 mmt last year valued at $7.68 billion, down 5% from the 2021 record. But pork sales to Mexico surged 10% to a record $2.03 billion.

 

Alternative competition fizzles

 

Meanwhile, as many consumers look to maximize their protein purchases at the meat counter, their appetite for alternatives fizzled in 2022.

 

The Washington Post reported retail sales of plant-based and high-tech meat substitutions dropped more than 10% in the past year following steady growth in the early stages of the COVID pandemic. Prices, nutrition and value for the dollar are among the reasons consumers decided to stick with the real thing when it comes to meat purchases. The cost of plant-based meat is still about two times higher than beef while alternative chicken is about four times as high, the Post reported.

 

While investment in alternative proteins continues, JBS SA announced plans last fall to shutter its two-year-old Planterra Foods U.S. plant-based meat operation. McDonald’s also recently discarded plans to roll out a McPlant burger nationwide. Overall, an Elanco Animal Health executive projects sales of plant-based meat will remain about 1% of the market through 2027 while meat demand continues to grow.

 

High food prices alter consumer behavior

 

A recent University of Illinois survey found consumers made significant changes to their food buying and consumption patterns in response to escalating prices.

 

The U of I Gardner Food and Agricultural Policy Survey recruited about 1,000 consumers to match U.S. population in terms of gender, age, income and geographic region. Researchers involved in the survey investigated 15 possible coping mechanisms to decrease the cost of food and found consumers began engaging in an average of 3.4 of those mechanisms as of November.

 

Here are highlights of how U.S. consumers say they’re coping with rising food prices:

  • 41% started buying a cheaper brand
  • 38.1% started spending less money on non-food items
  • 37.9% reduced the amount they bought from restaurants
  • 31.5% changed the types of food they purchased
  • 26.4% went to multiple grocery stores to buy items where they are cheapest
  • 26.2% started going to a cheaper grocery store
  • 25.4% used coupons
  • 25% used a food budget
  • 20.8% bought in bulk
  • 20.5% started going to cheaper restaurants
  • 17.3% started cutting the size of meals or skipping meals because there wasn’t enough money for food
  • 11.6% started using government assistance
  • 11.1% started going to a food bank or pantry
  • 9% grew their own food

 

The survey found consumers decreased their purchases of certain food categories to save money, led by 51.8% who decreased purchases of red meat followed by snacks/sweets (48.6%), seafood (48.5%) and poultry (32.6%).

 

The situation is even more challenging elsewhere. U.S. consumers spend an average of 10.3% of their disposable income on food compared to about 25% in China and Mexico, 37% in Ukraine and more than half in some African countries.

 

Looking ahead, recommendations to lower grocery bills include: plan ahead and stick to a shopping list; don’t shop when hungry; use coupons and shop for deals; consider canned and frozen fruits and vegetables to replace higher-cost items when those products are out of season; purchase meat on specials; and store more non-perishable items.

 

 

 

Economic slowdown could pressure food prices

 

The U.S. economy could slow significantly this year and inflationary pressure could ease in the process. If realized, the slowdown of rampant inflation certainly would be good news for Americans struggling with high prices for everything from food and home goods to fuel.

 

The Consumer Price Index showed the inflation rate eased slightly, from 6.5% in December to 6.4% in January. But, it’s still more than triple the Fed’s target of 2%. The Fed responded by raising interest rates eight times since March. The average ag interest rates (6.25% for farm operating loans and 6.13% for real estate loans) are the highest since 2008.

 

Estimates suggest the U.S. economy could slow significantly this year, with the gross domestic product possibly slipping from a robust 5.6% in 2021 and 1.9% last year to just .5% in 2023. Prices of some consumer products have started to ease in the process, although food prices remain elevated. But, those hoping for prices to decline to previous levels may be disappointed.

 

Farmer share of food dollar remains low

 

U.S. farmers have certainly benefited from higher commodity prices to help manage rising costs the past couple years. But they have not seen much, if any, boost in their share of the food dollar amid rampant price inflation.

 

Farmers’ share of the domestic food dollar averaged 14.5 cents for 2021, according to USDA’s food dollar series compiled by its Economic Research Service. That’s the lowest recorded farm share value in nearly three decades. The food dollar data for 2022 will be released later this year.

 

The lion’s share of each food dollar spent (85.5 cents) in the U.S. goes to everything from marketing, packaging and food processing to energy and transportation. Food prices as of January were up 10.1% compared to last year.

 

Consumer prices rose 6.4% nationwide last month. It marked the seventh straight month of smaller price hikes, but U.S. inflation is still more than triple the Federal Reserve’s target of 2%. Meanwhile, food prices at home were up 11.3% last month compared to the previous year. Food prices away from home increased 8.2%.

 

A prime example is a box of corn flakes. A farmer’s share of a product like that is less than 10% of the value. Marketing is the biggest share of the USDA food dollar.

 

The disconnect between farm and food prices is reflected in USDA’s latest farm income forecast. The Ag Department projects U.S. net farm income could fall 16% in 2023 compared to last year while costs are expected to increase 4% on top of last year’s record increase. Adding to the challenges, interest rates are rising and farm sector debt is projected to increase $31.9 billion to a record $535 billion.

 

USDA reported at least 11 food categories increased in price by more than 10% last year including fats and oils (18.5%), poultry (14.6%), other meats (14.2%), cereals and bakery products (13%), dairy (12%), non-alcoholic beverages such as soda pop (11%) and sugars and sweets (10.4%), among others.

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