Outlook for U.S. Retail Food Prices and Inflation, 2014

Richard Volpe, Ph.D.Food Markets Branch

Food Economics DivisionERS-USDA

Presented at USDA’s Agricultural Outlook ForumFebruary 20, 2014

Above-average Food Price Inflation in 2011

Beef Fats and oils Eggs Pork Fish and seafood0

2

4

6

8

10

12

10.2

9.3 9.28.5

7.1

Five Biggest Moving Major Categories

Perc

ent

Chan

ge, 2

010-

2011

2

• All food: 3.7%• Food-at-home: 4.8% Source: Bureau of Labor Statistics

Weaker Inflation in 2012

3

Beef Fats and Oils Poultry Dairy Products Fresh Fruits Pork Fresh Vegetables

-6

-4

-2

0

2

4

6

8

10

12

6.4 6.15.5

2.1

10.3

-5.1

Perc

ent

Chan

ge, 2

011-

2012

All food: 2.6%Food at home: 2.5%

Source: Bureau of Labor Statistics

What Happened to Food Prices in 2013?

Mixed Food Price Inflation in 2013

-4

-2

0

2

4

6

8

10

12

4.7 4.7

2

10.5

-1-1.7

All Food: 1.4%Food at home: 0.9%All Items: 1.5%

Source: Bureau of Labor Statistics

2013 in More Depth

All foodFood at home

Cereals and Bakery ProductsMeats Poultry and Fish

Meats Beef and Veal

PorkOther Meats

PoultryFish and Seafood

EggsDairy

Fruits and VegetablesFresh Fruits and Vegetables

Fresh Fruits Fresh Vegetables

Processed VegetablesNonalcoholic Beverages

Sugars and SweetsFats and OilsOther Foods

Food away from Home

-6 -4 -2 0 2 4 6 8

Bars indicate the percent change from January 2013 to December 2013.

Source: Bureau of Labor Statistics

Why Was Food Price Inflation so Low in 2013? Didn’t We Have a Drought/Fire/Flood/Freeze/Disease?

8

Where a Consumer Dollar Spent on Food Goes

Food Processing; 18.6%

Farm and Agribusiness; 11.6%

Food Services; 33.7%

Energy and Transportation ; 10.3%

Packaging; 4.0%

Retail Trade; 13.6%

Finance and Insurance; 4.4%

Advertising, Legal, Accounting; 3.8%

Source: A Revised and Expanded Food Dollar Series (2011), ERR114, Economic Research Service,

www.ers.usda.gov/data/FoodDollar/

• Despite the drought, most input costs were down– Intl Monetary Fund all-commodity index ended

2013 below where it began in 2012– All commodities, non-fuel commodities, industrial

inputs, energy prices all down 2012-2013• Pound of coffee down from $1.87 to $1.41• U.S. imported sugar down from $0.28 to $0.21 per lb.

• Exports fell, 2012-2013, for corn, soybeans, oils, fruits, red meat– Growth in exports was a major factor in 2011-

2012

Has Food Become More Expensive?

Food Price Inflation has Outpaced Economy-Wide Inflation in Recent Years

All Items

Food

Housing

Apparel

Transporta

tion

Medical C

are

Education

Recreation

0

5

10

15

20

25

30

Percent Change in Major CPI Categories, 2006-2013

Source: Bureau of Labor Statistics

But Many Food Prices Have Decreased over the Long Term

19841986

19881990

19921994

19961998

20002002

20042006

20082010

2012$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

BananasBreadEggsTomatoesChicken

Real (inflation-adjusted) prices for selected U.S. foods, 1984-2012

Real price per pound (per dozen for eggs) in 1982-84 dollars

Source: USDA, Economic Research Service calculations using data from the U.S. Bu-reau of Labor Statistics.

Bananas: -46%, Bread: 16%Eggs: -16%, Tomatoes: -15%Chicken: -18%

What is the Relationship between Food Prices and Commodity Prices?

Commodity Prices are Far More Volatile than Retail Food Prices

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

-30

-20

-10

0

10

20

30

40

50

60

Annual Percent Change in the Food CPI and the Average Farm Price of Corn, Wheat, and Soybeans

Field crop prices

All-food CPI

%

Source: National Agricultural Sta-tistics Service and Bureau of La-bor Statistics

• As the Food Dollar Series shows, the commodity share of the food dollar is 10-11%– Higher for perishables, much lower for processed

and shelf stable foods• Price contracts, transportation, and processing

mitigate and distribute commodity price impacts • Forecast models incorporate key commodities

– E.g. cattle for beef, wheat for bakery, soybeans for fats & oils

If Commodity Prices Don’t Have a Major Impact, What About Energy Prices?

19901992

19941996

19982000

20022004

20062008

20102012

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Annual Percent Change in Food and Energy Prices, 1990-2013

All-food CPI

Household energy CPI

Motor fuel CPI

Perc

enta

ge

Source: Bureau of Labor Sta-tistics

Energy Prices and Food Prices

• The importance of energy prices depends on the food category– More important as processing and transportation

costs increase in share• Questions remain with respect to the role

biofuels and the food-fuel connection• Diesel and electricity prices are key inputs to

ERS CPI forecast models

Why Have Restaurant Prices Increased So Much More/Less than Supermarket Prices?

Supermarket Prices Twice as Volatile as Restaurant Prices

199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Annual Percent Change in Food at Home and Food away From Home CPIs, 1990-2013

Food at Home

Food Away from Home

Source: Bureau of Labor Statistics

Food Prices in My City Have Gone Way Up in the Last Year. Why Do Your Numbers Show Such a Small Increase?

Food Price Inflation Varies Geographically

Anchorag

e

Atlanta

Boston

Chicago

Cincinnat

Clevela

ndDall

as

Denve

r

Detroit

Honolulu

Houston

Kansa

s City

Los A

ngeles

Miam

i

Milw

auke

e

Minnea

polis

New Yo

rk

Philadelp

hia

Phoenix

Pittsb

urgh

Portlan

d

San Dieg

o

San Fr

ancis

co

Seatt

le

St. Lo

uis

Tampa

Was

hington

0

5

10

15

20

25

30

35

40

45

Percentage Change in the Food-at-Home CPI, 2004-2012

Source: Bureau of Labor Statistics

And There Seems to be a Connection to Market Structure

Anchora

ge

Atlanta

Boston

Chicago

Cincinnati

ClevelandDalla

s

Denver

Detroit

Honolulu

Houston

Kansas C

ity

Los A

ngeles

Miami

Milw

aukee

Minneapolis

New York

Philadelphia

Phoenix

Pittsb

urgh

Portland

San Diego

San Francis

co

Seattle

St. Lo

uis

Tampa

Wash

ington D

C

-60

-40

-20

0

20

40

60

80

Percentage Change in the FAH CPI and the Food HHI, 2004-2012

CPI HHI Food

ρ = 0.36

Source: Bureau of Labor Statistics and Nielsen TDLinx Data

What Can We Expect in 2014?

25

2014 Inflation Predicted to be Near Historical Average

Source: Bureau of Labor Statistics

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Low

2014 High

0

1

2

3

4

5

6

2.12.3

3.2

1.8

2.2

3.4

2.4 2.4

4

5.5

1.8

0.8

3.7

2.6

1.4

2.5

3.5

2014 Outlook in Depth• Commodities

– Projected output for grains and oilseeds strong– Possibly some contraction for fluid milk– Cattle numbers decline further before recovering

• Energy prices– EIA: flat or declining crude oil prices in 2014

• Weather– Polar vortex, CA drought, other unforeseeables

2014 Outlook In Depth

• Retailer pricing behavior– The PPI illustrates changes in farm and wholesale

prices– Relative changes in PPI and CPI allows inference

into retailer margins– Strongly cyclical

Will We See Another Big Drop in Farm/Retail Prices?

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Annual Percent Changes in Food-at-Home CPI and Key Food PPIs

Farm Products Intermediate Food/Feed

CPI - Food At Home

Source: USDA Economic Research Service using data from the Bureau of labor Statistics

???

2014 PPI ForecastsItem

Month-to-Month

Year-over-Year

Annual 2012 Annual 2013 Forecast 2014 Nov 2013 to Dec 2012 to

Dec 2013 Dec 2013 Percent ChangeCrude foodstuffs and feedstuffs -0.5 -6.2 4.2 1.9 NAIntermediate foods and feeds 0.3 -3.1 4.8 1.3 NAFinished consumer foods -0.4 0.6 2.6 2.2 NAFarm level cattle 0.0 6.0 8.6 1.4 5.0 to 6.0Wholesale beef -0.3 -1.7 10.0 -0.4 1.5 to 2.5Wholesale pork -2.7 4.1 -4.1 3.6 5.5 to 6.5Wholesale poultry -0.9 -1.0 11.2 3.8 2.0 to 3.0Farm level eggs 5.8 20.2 1.4 9.4 4.0 to 5.0Farm level milk 2.3 4.3 -8.1 7.6 0.0 to 1.0Wholesale dairy 1.0 0.9 -1.6 3.5 -1.0 to 0.0Farm level soybeans 0.5 -9.9 13.2 -1.8 -8.0 to -7.0Wholesale fats and oils -0.3 -7.9 -2.0 -6.7 -5.0 to -4.0Farm level fruits 0.2 -5.2 1.1 1.8 1.5 to 2.5Farm level vegetables -13.4 22.5 -19.8 26.4 -4.0 to -3.0Farm level wheat -0.4 -16.1 -2.6 -3.0 -8.0 to -7.0Wholesale wheat flour -0.2 -6.3 2.0 0.0 -10.0 to -9.0

Expanding Retailer Margins?

• These effects would resonate most in the supermarket aisles – Where inflation has been so low– Other foods, snacks, sweets, breakfast cereals

• Watch the PPIs closely early in 2014

ERS and Retail Food Prices• Forecasting is only a part of the job• Food prices are a vital component to

answering a myriad of economic questions• If you have a question about or involving retail

food prices, chances are there is an expert on the topic in the Food Economics Division (FED)

ERS Research on Retail Food Prices

• Kumcu and Okrent: “Methodology for the Food-Away-From-Home and Alcohol Prices Database,” forthcoming– New, forthcoming database of prices for full service,

limited service, vending machines, and schools– Uses micro data from BLS CPI– In conjunction with QFAPHD will help describe food

choices and dietary quality as a function of prices

ERS Research on Retail Food Prices

• Volpe (2013): “How Transportation Costs Affect Fruit and Vegetable Prices”– Produce prices are very sensitive to fuel prices– Impact depends on route traveled and method of

transport– Commodities with higher import shares show

weaker fuel price impacts

ERS Research on Retail Food Prices

• Carlson, Dong, & Lino: “Association between Total Diet Cost and Diet Quality is Limited,” forthcoming Journal of Agricultural and Resource Economics– Total food expenditures rise only slightly with

dietary quality– Fruits and vegetables are inexpensive in serving

terms– Many improvements to dietary quality do not

necessitate increased food expenditures

35

Current Forecasts (a)Items 2011 2012 2013 Forecast

2014

All Food 3.7 2.6 1.4 2.5 to 3.5

FAFH 2.3 2.8 2.1 2.5 to 3.5

FAH 4.8 2.5 0.9 2.5 to 3.5

Beef 10.2 6.4 2.0 3 to 4

Pork 8.5 0.3 0.9 2 to 3

Other Meats

6.4 1.7 -0.1 2 to 3

Poultry 2.9 5.5 4.7 3 to 4

36

Current Forecasts (b)Items 2011 2012 2013 Forecast

2014

All Food 3.7 2.6 1.4 2.5 to 3.5

FAH 4.8 2.8 2.1 2.5 to 3.5

Fish 7.1 2.4 0.9 2.5 to 3.5

Dairy 6.8 2.1 0.1 2.5 to 3.5

Fats and Oils 9.3 6.1 -1.4 1.5 to 2.5

Sugar +Sweets

3.3 3.3 -1.7 2 to 3

Eggs 9.2 3.2 3.3 2 to 3

37

Current Forecasts (c)Items 2011 2012 2013 Forecast

2014

Fresh Fruits 3.3 1 2.0 2.5 to 3.5

Fresh Vegetables

5.6 -5.1 4.7 2 to 3

Processed F + V

2.9 3.8 0.3 2.5 to 3.5

Cereals + Bakery

3.9 2.8 1.0 1.5 to 2.5

Nonalc. Bev. 3.2 1.1 -1.0 2.5 to 3.5

Other Foods 2.3 3.5 0.5 2 to 3

Resources for Food Price Trends Research

• ERS CPI Forecastshttp://www.ers.usda.gov/data-products/food-price-outlook.aspx

• New ERS Reportshttp://www.ers.usda.gov/publications/err129/http://www.ers.usda.gov/Publications/EIB75/http://www.ers.usda.gov/Publications/ERR105/

• BLS CPI, PPI, and Average Price Datahttp://data.bls.gov/PDQ/outside.jsp?survey=cuhttp://data.bls.gov/PDQ/outside.jsp?survey=wphttp://data.bls.gov/PDQ/outside.jsp?survey=ap

• AMS Fruit and Vegetable Reporthttp://www.ams.usda.gov/mnreports/fvwretail.pdf

• IMF World Commodity Priceshttp://www.imf.org/external/np/res/commod/index.asp

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Contact Information

Richard Volpe, PhDrvolpe@ers.usda.gov

202-694-5395

Annemarie Kuhns, MSamkuhns@ers.usda.gov

202- 694-5351

For more information, see http://www.ers.usda.gov/data-products/food-price-outlook.aspx