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Will U.S. Food Prices Follow Global Trends?

U.S. consumers eat more processed foods and more food prepared away from home, which skews the influence that commodity prices have on retail food costs.

To some extent, global and U.S. food inflation is affected by high commodity prices, says Jason Henderson, Omaha branch executive with the Federal Reserve Bank of Kansas City. But differences between U.S. and world consumption patterns partially mitigate the trend.

Driven by higher commodity prices, global food prices soared to record highs in 2011, Henderson says in his quarterly Main Street Economist report released last week. “World populations are paying record prices for cereals, sugars, meats and all other types of food products,” he says. That is straining the household budgets of global consumers, especially those in poorer nations where food spending can account for almost half of household expenditures.

In the U.S., however, consumers eat more processed and prepared foods, which reduces the influence of commodity prices on retail food costs.

The reason for that, Henderson says, is that the labor costs of processing and preparing food for consumers have a stronger influence on food prices than does commodity price. “As a result, even if commodity prices retreat from their historical highs, the larger contribution of wages to food production costs in the U.S. could limit fluctuations in U.S. food prices,” he says.

Dwindling crop supplies had a strong influence of global food prices, pushing those 30% higher the first half of the year. Meat prices rose, but by a more modest 15%.

U.S. consumers, however, saw a much more muted response. In 2010, rising commodity prices also began to lift U.S. food prices, Henderson says, although U.S. prices rose more slowly than global prices. “By July 2011, U.S. food prices were 4% above year-ago levels, which still paled in comparison to the global price increase.”

Much of that muted response was due to crop-based prices, which rose 4.3%. Meat prices, however, rose 10%. Because crop-based foods are much more highly processed than are meat items in the U.S., the effect of labor costs is more pronounced, Henderson explains. “With additional processing, commodity prices play a smaller role in the final retail food dollar,” he says. “In fact, farm commodities account for roughly 15% of U.S. retail food costs today, down from 33% in the 1970s.”

Broken down by its origin, he says that USDA estimates that only 7% of the U.S. retail price of cereal-based food is derived from the cost of farm-based commodities. In contrast, more than half of the retail price of U.S. beef products is derived from commodities.

Looking to the future, Henderson expects this divergence between U.S. and global food inflation to continue. “Global food prices will continue to be shaped more by future commodity prices, “ he says, “while U.S. food prices may be driven more by wages and economic growth.”

To read the entire report, click here.