Food Price Outlook: Drought to Increase Retail Food Prices in 2013

October 25, 2012 03:07 AM

Retail food prices have on average been flat thus far in 2012. The food-at-home Consumer Price Index (CPI) was unchanged from January to September 2012, with deflationary pressure due to unusually low fruit and vegetable prices as well as decreased prices for fluid milk and pork. On the other hand, prices for beef and veal, poultry and fats and oils have increased thus far in 2012.

The Midwest drought is affecting corn and soybean prices among other field crop prices. Eventually, this will increase retail food prices, but that will take some time. Most of the impact of the drought is expected to be realized in 2013.

Based on these conditions, ERS's inflation forecast for both all food and food-at-home (grocery store) prices in 2012 remains unchanged at 2.5% to 3.5%, with another 3% to 4% increase expected for 2013. Looking ahead to 2013, inflation is expected to remain strong for most animal-based food products due to higher feed prices. Furthermore, inflation should be above the historical average for food categories such as cereals and bakery products as well as other foods.

The CPI for all food increased 0.1% from August to September, increased 0.2% from July to August, and is now 1.6% above the September 2011 level. The food-at-home CPI was unchanged in September and is up 0.8% from last September, while the food-away-from-home (restaurant) index increased 0.2% in September and is up 2.8% from last September. The all-items CPI was up 0.4% in September and is 2% above the September 2011 level.

The year-over-year increase in the food-at-home CPI has fallen each month so far in 2012, which indicates that food price inflation has slowed down since 2011 and that the impact of the drought has not yet materialized in retail food prices. Any effect on retail prices would begin to appear on supermarket shelves in the fall of 2012. A more detailed breakdown of the outlook follows:

  • Beef, pork, poultry, and dairy (fluid milk): The earliest increases in retail prices would appear within 2 months in 2012 and into 2013. In the short term, drought conditions may lead to herd culling in response to higher feed costs and short-term increases in the meat supply, decreasing prices for some meat products. That trend would reverse in time after product supplies shrink.
  • Packaged and processed foods (cereal, corn flour, etc.): The full effect of the increase in corn prices for packaged and processed foods will likely take 10 to 12 months to move through to retail food prices.
  • Retail prices: Historically, if the farm price of corn increases 50%, then retail food prices (measured by the Consumer Price Index, CPI) will increase by 0.5% to 1%. More generally, as an overall commodity price index increases, about 14% to 15% of that increase is passed on to retail prices for products that use that commodity as an ingredient. For most foods, it is too soon for higher commodity prices to affect retail prices. Food-at-home prices have not increased from January to September, reflecting a decline in overall inflation since last year. However, egg prices have risen since July, and beef prices have fallen moderately. Both of these movements are in line with expectations.

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