USDA Lowers Forecast for 2016 Overall, Grocery Store Price Increases

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The level of food price inflation overall and for grocery store food items in 2016 has been reduced by USDA, with overall food price inflation now forecast at 1.5% to 2.5% compared to a 2% to 3% outlook in March, according to USDA’s Economic Research Service (ERS).

USDA economists downwardly revised the food at home (grocery store) price increase for a second month in a row, now forecast at 1% to 2% rise compared to a 1.5% to 2.5% increase in March. The downward adjustment reflects several adjustments to prices for meat and related products, as meat, poultry and fish prices are seen rising 0.5% to 1.5% at the grocery store, down from an outlook for a 1% to 2% rise in March.

Beef prices are now seen declining 2% to 1% (-1.0% to 0.0% in March) while pork prices are seen in a range of -0.5% to 0.5% (0.0% to 1.0% in March). Egg prices however, were dropped dramatically to a decline of 10% to 9% after being at -1.5% to -0.5% in March. The egg price situation is reflective of the poultry industry recovery from avian influenza which devastated US egg-laying flocks, tightening supplies and raising egg prices in 2015 by 17.8%.

Behind the forecast decline in beef prices: Beef and veal prices increased 1.1% from February to March but are still 5.1% lower than this time last year. In previous months, price changes were affected by declining U.S. beef exports, which helped to increase the supply of beef on the U.S. market. This increased supply, along with weak beef demand, has placed downward pressure on retail beef prices. Additionally, favorable pasture conditions in some areas in 2015 and lower feed prices have allowed cattle producers to feed cattle longer and to hold cattle for herd expansion. ERS predicts beef and veal prices will decrease 2.0% to 1.0% in 2016.

Behind the change in the pork price forecast: In March, pork prices rose 0.1% from the previous month but are still 5.6% lower year-over-year. In 2014, retail pork inflation was largely due to the effects of PEDv, which had reduced the autumn number of hogs ready for production. In 2015, however, hog prices fell below 2014 figures, as there were signs of industry expansion and a lower volume of pork exports due to the strength of the U.S. dollar. This pattern has continued into 2016, and ERS now predicts pork prices to change between -0.5% to 0.5% in 2016.

Meat, fish and poultry prices ahead: Due to an expectation of lower price inflation for beef, veal, and pork, the meats forecast has been lowered and is now expected to rise 0.0 to 1.0%, and meats, poultry, and fish are now expected to rise between 0.5% to 1.5% in 2016.

The sharp downward revision for forecast egg prices: Egg prices decreased 5.8% from February to March, but prices are still 0.7% above March 2015 levels. Retail egg prices are among the most volatile retail food prices, as they can be affected by seasonal demand. The upswing in 2015 was primarily due to the HPAI outbreak, which decreased the table-egg-laying flocks in the Midwest and Pacific Northwest by 11% (33 million egg layers). In the first quarter of 2016, egg production is forecast to be down due to smaller flock sizes and lower egg-laying rates per bird. Overall, as the industry continues to recover from this outbreak, prices at the retail level are expected to decline in 2016. ERS now forecasts egg prices to decrease 10.0% to 9.0% in 2016. (Note that this change in the forecast for eggs is singularly large, primarily due to changes in farm-level input forecasts used in the underlying multi-stage model).

Comments: The level of food price inflation continues to run well below the 20-year average for overall food prices (2.6%) and food at home/grocery store prices (2.5%). Food away from prices are actually forecast to increase slightly more than the 20-year average, with a 2.5% to 3.5% increase compared to a 2.7% 20-year average. But that is up from a 2015 level of just a 1.2% rise. The impact of meats shows the most in the grocery store prices and USDA did still note that a continued strong US dollar could further depress food prices as it would temper exports and boost food supplies domestically.

NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.