If you’re like me, then you are very fond of food. What determines the price of food? Supply and demand of course!
We can consider food as a commodity because just about anyone can buy and sell it. Almost all foods have partial substitutes. Therefore, the long-run price in the competitive market for food is largely dictated by the marginal cost. Demand has an impact on the price only in the short run.
A long-run driver of food prices are the costs that food producers face. The US Bureau of Labor Statistics divides the Producer Price Index into multiple categories that are relevant for a variety of sectors and points within the production process. Below is a table of the most fundamental, relatively unprocessed farm products and their weight among all farm products in December 2021. Cotton is a relatively large component for farm products even though it’s not a food and I include it for completeness. Fruits, veggies, and nuts makeup the overwhelming proportion of the cost of farm products. I was at first surprised that grains composed such a small proportion. But, being dirt cheap, it makes sense.
We all know that inflation has been in the news. It’s been elevated since the second quarter of 2021. Consumer prices tend to lag producer prices. One indicator of where food prices will be in the near future is where the producer prices are now. Below is a graph that displays the above seasonally adjusted farm product prices since the start of 2021*.
What we see is that that most of the price indices peaked in the first half of 2022, with livestock and cotton being the only exceptions. Even their prices are concave. All of the other prices have recently been in decline or flat. This doesn’t mean that our retail food prices will necessarily fall. Many of the higher prices are likely permanently higher and there is no going back. But there is reason to hope for reprieve from the battle against increasing prices.
Of course, producer prices of the goods are not the only cost to supply consumers. The price of retail services also matter. Prices for goods on the shelf cover the costs of overhead, employee compensation, etc. Below is the PPI for food retail. Unfortunately, the trend doesn’t bode well for consumers. The price of food retail services have been increasing almost linearly for the past year – and fast. Those prices have yet to peak as far as we can tell. Maybe we can hope that food retail costs lag all other retail costs? There is good reason to believe that food retailers face a more substantial cost of utilities, what with all the freezing and cooling. Maybe the food retailer PPI will fall as the utility prices come back down. But that’s a big maybe.
The net effect on consumer food prices should be net negative in the coming months. The percent change of PPI for farm products swamps that of retail by multiple times. Regardless, we’ll have a clearer and more confident view when October’s PPI data is released this coming Tuesday.
*I seasonally adjusted Fruit&Veg, Cotton, Eggs, Seed, Retail, & Food Retailing manually. All data is listed on FRED, except for Food Retail which is listed on BLS.