14.5: Food Cost and Inflation

Learning Objectives

  • Cite a recent event that has had a profound effect on how consumers feel about the food supply.
  • Give a historical overview of the era of cheap food.

Statistics show that Americans spend more than $1.5 trillion on food each year at supermarkets, in restaurants, and from other food providers.Plunkett Research, Ltd. “US Food Industry Overview.” 2011. http://www.plunkettresearch.com/food%20beverage%20grocery%20market %20research/industry%20statistics. According to the USDA, a thrifty family of four spends about $540-$620 per month on groceries.US Department of Agriculture. “Official USDA Food Plans: Cost of Food at Home at Four Levels, US Average, August 2011.” Issued September 2011. http://www.cnpp.usda.gov/Publications/FoodPlans/2011/CostofFoodAug2011.pdf. A number of factors affect the rising cost of food. They include agricultural production, processing and manufacturing, wholesale distribution, retail distribution, and consumption.

Around the world, commodity prices rose sharply in 2010 as crop production shortfalls led to reduced supplies and a higher volatility in agricultural markets. Other factors that played a role in increasing food prices include a population boom that has drastically increased demand, droughts and other natural disasters that have crippled farmers, and trade policies and practices that are unfair to developing nations.

Rising agricultural commodity prices have led to concerns about food insecurity and hunger. In an agricultural outlook report for 2010–2020, the Secretary-General of the Organisation for Economic Co-operation and Development states, “While higher prices are generally good news for farmers, the effect on the poor in developing countries who spend a high proportion of their income on food can be devastating. That is why we are calling on governments to improve information and transparency of both physical and financial markets, encourage investments that increase productivity in developing countries, remove production and trade distorting policies, and assist the vulnerable to better manage risk and uncertainty.”Organisation for Economic Co-operation and Development. “OECD-FAO Agricultural Outlook 2010–2020.” June 17, 2011. http://www.oecd.org/document/31/0,3746,en_21571361_44315115_48182047_1_1_1_1,00.html.

Who Bears the Cost?

The cost of our food is influenced by the policies and practices of farms, food and beverage companies, food wholesalers, food retailers, and food service companies. These costs include the energy required to produce and distribute food products from farm field to supermarket to table. Rising prices also reflect the marketing and advertising of food. All of these factors affect all participants in a food system, but some participants are more affected than others. A 2011 report by the Economic Research Service of the USDA shows the division of the consumer food dollar among various aspects of the American food system. A far greater amount of the money you spend to buy a product goes toward the marketing components than toward the actual farmer.US Department of Agriculture, Economic Research Service. “Overview.” Last updated November 19, 2012. http://www.ers.usda.gov/data-products/food-expenditures.aspx.

The Consumer Price Index

The Consumer Price Index (CPI) measures changes in the price level paid for goods and services. This economic indicator is based on the expenditures of the residents of urban areas, including working professionals, the self-employed, the poor, the unemployed, and retired workers, as well as urban wage earners and clerical workers. The CPI has subindices for many different types of products, including food and beverages. It is a closely-watched statistic that is used in a variety of ways, including measuring inflation and regulating prices.

Implications Around the World

Food prices and inflation disproportionately affect people at lower income levels. For the poorest people of the world, increasing prices can raise levels of hunger and starvation. In many developing countries where the cost for staple crops steadily rises, consumers have faced shortages or even the fear of shortages, which can result in hoarding and rioting. This happened in 2007 and 2008 during rice shortages in India and other parts of Asia. Rioters burned hundreds of food ration stores in the Indian region West Bengal. In the West African nation Burkina Faso, food rioters looted stores and burned government buildings as a result of rising prices for food and other necessities.Vivienne Walt, “The World’s Growing Food-Price Crisis,” Time Magazine, 27 February 2008. http://www.time.com/time/world/article/0,8599,1717572-1,00.html. In some poor countries, protests also have been fueled by concerns over corruption, because officials earned fortunes from oil and minerals, while locals struggled to put food on their tables. Bringing down prices would quell protests, but could take a decade or more to accomplish.

The End of the Era of Cheap Food

Concerns about food shortages and rising prices reflect the end of the era of cheap food. Following World War II, grain prices fell steadily around the world for decades. As farms grew in scale, factory-farm practices, such as the use of synthetic and mined fertilizers and pesticides, increased. Agribusinesses also invested in massive planting and harvesting machines. These practices pushed crop yields up and crop prices down. Food became so inexpensive that we entered what came to be called the “era of cheap food.”

However, by 2008, economic experts had declared that the era of cheap food was over. The rapid growth in farm output had slowed to the point that it failed to keep pace with population increases and rising affluence in once-developing nations. Consumption of four staples—wheat, rice, corn, and soybeans—outstripped production and resulted in dramatic stockpile decreases. The consequence of this imbalance has been huge spikes felt moderately in the West and to a much greater degree in the developing world. As a result, hunger has worsened for tens of millions of poor people around the world.Justin Gillis, “A Warming Planet Struggles to Feed Itself,” The New York Times, 4 June 2011. http://www.nytimes.com/2011/06/05/science/earth/05harvest.html?_r=2&hp.

Two major trends played a part in this shift. First, prosperity in India and China led to increased food consumption in general, but more specifically to increased meat consumption. Increased meat consumption has led to an increased demand for livestock feed, which has contributed to an overall rise in prices. The second trend relates to biofuels, which are made from a wide variety of crops (such as corn and palm nuts), which increasingly are used to make fuel instead of to feed people.

The world population in 2010 was 6.9 billion.United Nations. “World Population Prospects, the 2010 Revision.” http://esa.un.org/wpp/Analytical-Figures/htm/fig_1.htm. It is projected to grow to 9.4 billion by 2050.Food and Agricultural Organization of the United Nations. “Executive Summary.” http://www.fao.org/docrep/004/y3557e/y3557e03.htm. The rate of increase is particularly high in the developing world, and the increased population, along with poverty and political instability, are helping to foster long-term food insecurity. In the coming decades, farmers will need to greatly increase their output to meet the rising demand, while adapting to any future trends.Christian Science Monitor. “Why the Era of Cheap Food Is Over.” December 31, 2007. http://www.csmonitor.com/2007/1231/p13s01-wogi.html.

Key Takeaways

Food prices are rising in the United States and around the world, which has greatly affected both agricultural producers and consumers. A number of factors have contributed to rising costs, including population booms, natural disasters, and the production of biofuels, among others. Economic experts have declared that the era of cheap food, which began after World War II, has ended due to rising population rates and decreased agricultural production worldwide. As a result, hunger has worsened for tens of millions of poor people globally.

Discussion Starter

  1. Examine the graphics from http://www.ers.usda.gov/data-products/food-dollar-series/documentation.aspx. What does each image indicate about agriculture and the American economy?