The Economics of Food Production and the Role of InflationFri, 26 Aug 2022 08:56:26 CDT
Each time a consumer steps into the grocery store, they can’t help but notice the increasing prices. There’s no doubt we are experiencing massive inflation, and groceries are one of the areas where families are seeing it the most. Many people want to know why inflation is greatly impacting the cost of our groceries.
According to a USDA Report, in 2020, expenditures on food were estimated at an average of about 12% of an American’s household budget. Since the report was released is it evident that the percentage has increased, consuming more and more of a family household budget.
The most obvious impacts that producers and consumers have faced are the lingering pandemic and the recent conflict between Ukraine and Russia. These may be the most talked about, but there is a much bigger picture to look at for the answers.
Inflation and Food
“Inflation is defined as a general rise in prices which causes a decline in purchasing power of consumers and producers over time, holding all other factors constant,” according to the University of Kentucky.
On a domestic level, food is shipped and distributed across long distances. Fruits and vegetables that are grown in more temperate climates to provide out-of-season products must be distributed across states and/or countries. Livestock and poultry must be transported either directly from the farm or feed yard to a processor and then shipped out for retail sales.
A big part of the inflation we are seeing now is due to our highly globalized world, heavy reliance on trade, egregious regulations, and high cost of fuel. The combination of events coupled with worker shortages is another hindrance to the ability to move food from ports to plates.
When there are disruptions in the supply chain or changes in demand conditions – both of which there has been an abundance of in recent years – there will be a disturbance in the marketplace which leads to inflation.
Food Production is Specialized
Today’s food economics are perhaps as complicated as they’ve ever been at any point in history. Food production is highly specialized and is made up of many niches within the wider agriculture industry. Each sector is upheld by its own intricate economics that is subject to specific disruptions, growth, and even natural events.
It All Starts at the Farm
Even though food production is specialized, it all starts on the same fundamental level: the farm. Each farm is made up of individual producers and families. According to the U.S. Department of Agriculture (USDA), around 97% of farms are privately owned and operated by families.
Despite their essential role in the food supply chain, commodities are certainly not immune to foundational challenges at the farm level. Crop failure, drought, and delays in planting or harvesting can all affect the supply chain. These products are also heavily involved in the export markets, furthering the strain on supply and demand.
Sky High Fuel Prices Equals Sky High Commodities Prices
With the rising cost of production of commodities due to the rise in the cost of fuel, energy, and fertilizer, many farmers are incentivized or forced to cut back on production in the short or long term.
We are now seeing a rise in prices which includes a 55.2% increase in the Food and Agriculture Organization’s Food Price Index, and a 159.4% rise in edible oil prices. Most noticeable is the increased prices of commodities like sugar, dairy, and cereals.
Commodities including dairy, grains, and oilseeds are also key ingredients for many food products and consumer staples.
The ongoing drought across the western states has put an additional strain on the availability of hay, certain grains, and beef production. These issues are prompting many ranchers to cut back on their herd sizes.
There are some sectors of livestock production that have the ability to flex with the availability of commodities. When certain feed ingredients are unavailable, many producers will turn to the use of byproducts from other food production industries to meet the nutritional needs of their herds. This includes a wide range of products, from leftover brewers’ grains to stale bakery goods, almond hulls, and even candy. Utilizing these ingredients helps decrease the high cost of feed and makes production more affordable while simultaneously making a more sustainable product.
However, even with these efforts, the farm-end of the farm-to-table chain has very little influence on the retail prices paid by consumers at the grocery stores. Livestock producers are essentially price takers, with their buyers being processors and distributors who will pay according to the current market rates. These rates are impacted by a variety of factors along the supply chain.
High-value, labor-intensive crops such as fresh produce, nuts, fruits, and berries are especially vulnerable to economic and political turbulence. These products rely heavily on manual labor, especially for their harvesting, processing, and packaging. During labor shortages or due to the implementation of new and complicated labor laws, a lack of help can increase prices or force farmers to cut back on production.
Some of these specialty foods are also reliant on specific fertilizers, proper storage facilities, and time-sensitive transportation. When the prices of those resources increase, it sharply increases the price seen on the retail end. Not only are such crops in high demand and usually perishable, but frequently they are some of the first to undergo abrupt price changes due to economic and political factors.
Along with increased prices, economists are also noting that consumers have adjusted their buying habits. Changes are being seen in the marketplace where consumers are substituting lower-priced items, tightening their grocery list, and reducing eating out at restaurants. All these behaviors add up to changes in the larger food economy.
Families who once had diverse in-home dining options may resort to eating the same thing multiple nights in a row. Those accustomed to eating more frequently out at sit-down-style restaurants may swiftly adjust to eating more at take-out or fast food chains.
The rise of COVID saw a boom in more people using order-in and take-out meal services which was a boon for certain food industries. This food service sector boom had a significant impact on ingredients and products intended for the wholesale market. However, the rising cost of food prices is leading more people to be judicious about their purchases.
Inflation is Hurting Low Income Families the Most
Increased prices have driven some lower-income families to redirect funds from other critical purchase decisions (i.e. health care related or insurance coverage) toward feeding the family. Elevated prices also directly correlate with food insecurity and the need for food assistance programs and food banks.
The Widespread Impact
According to the U.S. Bureau of Labor Statistics, our food inflation hit 10.9% in July 2022.This is the highest it has been since 1979. Unfortunately, the basic factors that cause inflation impact all food categories, whether high-end labels, generic brands, fast food, or fine dining.
This has increased food insecurity across the board, but more so in low-income households who dedicate a larger portion of their income to food. Dairy, eggs, and grain products that were once reliably affordable are now up across the board due to widespread economic factors.
Food production will always be dependent on the resources and finances available to farmers, both domestically and internationally. With a plethora of food choices open to consumers, their change in behavior to accommodate increased prices will also impact the demand and supply of various commodities.
Until many of the underlying socioeconomic issues are resolved at the root levels, the cycle of high retail prices coupled with difficult farm production and distribution are likely to continue.
What Can You Do?
All this can sound overwhelming and leave a person feeling hopeless, but there are things you can do right now to help. The first is to stay informed and to inform others in your community. The second is to get involved directly in the decisions that are being made in your city, county, and state that will affect our food supply. You can learn more about how to get involved by visiting our website. We cannot rely on others to fix these problems, it is up to each of us to do what we can to protect our food security.
Article by By Jaclyn Krymowski for Protect The Harvest
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