#171. Have You Noticed?

Posted on | The Agurban
Have You Noticed?

Food price inflation in 2007 rose twice as fast as overall inflation. On an annual basis, 2007 retail food prices rose 4 percent above 2006 levels, outpacing the 2.3 percent gains in core consumer price inflation, a measure that excludes the volatile food and energy sectors. And, perhaps more important, food price inflation accelerated as the year progressed. By December, retail food prices had posted their biggest annual gain since 1990.

In 2008, food price inflation is expected to ease but remain high by historical standards. In December, the USDA forecast annual food price inflation to range between 3 and 4 percent, below 2007 gains but well above the ten-year average of 2.6 percent. Labor costs have emerged as the biggest component of the retail food dollar. Labor is used to process and manufacture food, serve food at restaurants, and sell good at supermarkets and other food stores. In the year ahead, labor costs are expected to fuel food price increases.

Energy prices are also a large component of the retail food dollar, boosting prices by raising the costs of processing, manufacturing, and transporting food. Surging energy costs will continue to translate into higher food prices in 2008. Historically, food prices have surged during times of higher crude oil prices. With the inherent volatility of energy markets, the impact of energy on food prices is highly uncertain.

The farm commodity share of the retail food dollar has also been declining because increases in farm commodity prices have been relatively modest. After rising sharply in the 1970s, commodity prices have been relatively flat, even with annual price spikes. For example, U.S. corn prices averaged $2.10 from 2000 to 2005, equaling the average annual price of corn in the 1970s. A similar story emerged for wheat, soybeans, pork, beef, and milk prices. Historically, farm commodity prices have moved in tandem with retail food prices. The two are expected to move together in 2008.

Many of you from a rural and/or farm background have undoubtedly heard “urbanites” say they don’t care what the price of corn is. I can assure you, as the price of groceries and eating out continues to climb, EVERYONE is going to be concerned about the price of corn!

The new record prices for many agricultural crops like soybeans, corn, wheat, rice and others are having a profound impact upon many rural communities, reminiscent of the 1970s. Those heady times were followed by a severe ag recession (some would call it a depression) in the 1980s that severely altered the ag landscape in many areas. We hope that this new boom in ag is longer lived and will have a more positive and longer lasting impact in rural America.


Source:Ā The Main Street Economist, 2008, Vol. III, Issue I, Federal Reserve Bank of Kansas City.