Outlook for U.S. Retail Food Prices and Inflation in 2010

February 18, 2010 1

Outlook for U.S. Retail Food Prices and Inflation in 2010

Ephraim Leibtag, PhDFood Markets Branch, Food Economics Division

ERS-USDA

Presented at the 2010 Agricultural Outlook ForumSustainable Agriculture: The Key to Health & Prosperity

February 18, 20102

CPI vs. CPI for Food 1970-2009

-202468

10121416

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Ann

ual P

erce

nt C

hang

e

CPI CPI for Food

February 18, 20103

Long Term Food Price Inflation Trends

8.1

4.62.8 2.9

02468

10

Average Annual Percent Change in Food Price Inflation by Decade

1970s 1980s 1990s 2000s

February 18, 20104

Food at Home vs. Food Away from Home, 1999-2009

Annual Percent Change

01234567

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CPI for Food at Home CPI for Food Away from Home

February 18, 20105

Food vs. Energy, 1970-2009

-20

-10

0

10

20

30

40

50

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008A

nnua

l Per

cent

Cha

nge

CPI for Fuel Oil CPI for Gas and Electricity CPI for GasolineCPI for Food CPI for Medical Care

*Last Twelve Months

February 18, 20106

Food vs. Energy, 1990-2009

-20

-10

0

10

20

30

40

50

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008Ann

ual P

erce

nt C

hang

e

CPI for Fuel Oil CPI for Gas and Electricity CPI for GasolineCPI for Food CPI for Medical Care

*Last Twelve Months

February 18, 20107

Sources of Retail Price Changes Changes in Costs

Cost of Goods Sold Operating Costs

Changes in Retail Market Competition Number of retailers in a market Type of retailers

Specialization Differentiation

Changes in Consumer Demand

Source: Bill Lapp, Advanced Economic Solutions using BLS data

February 18, 20109

PPI for Retail Grocery Department Margins

-10

-5

0

5

10

15

20

2001 2002 2003 2004 2005 2006 2007 2008 2009

Grocery PPI Center Aisle Food ItemsMeat PPI Dairy PPIBakery PPI Produce PPIFrozen Food

February 18, 201010

Where a Consumer Dollar Spent on Food Goes

Source: Economic Research Service Calculations using 2006 Data

Profits, 4.0%Depreciation and

Repairs, 5.0%Rent and Interest,

6.5%

Taxes and Other Costs, 7.0%

Energy and Transportation ,

8.0%

Advertising and Packaging, 12.0%

Farm value, 19.0%

Labor, 38.5%

February 18, 201011

Trends in Retail Food Markets

Impact of the Recession and RecoveryImpact of the Recession and Recovery Volatility in food commodity marketsVolatility in food commodity markets Transportation and energy costsTransportation and energy costs Competition from a variety of formatsCompetition from a variety of formats

Supercenter/Warehouse Club/Dollar/Limited Supercenter/Warehouse Club/Dollar/Limited Assortment/Upscale/GourmetAssortment/Upscale/Gourmet

Food SafetyFood Safety Location and size of storeLocation and size of store Local/Natural/Organic /Fresh/Local/Natural/Organic /Fresh/NoTransFatNoTransFat//……

February 18, 201012

GDP Growth and Food Inflation, 1930-2010*

-20-15-10-505

101520

1930 1940 1950 1960 1970 1980 1990 2000 2010

Ann

ual P

erce

nt C

hang

e

Real GDP Percent Change Food CPI Percent Change*2010 forecasts

February 18, 201013

GDP Growth and Food Inflation, 1990-2010*

-10

-5

0

5

10

1990 2000 2010

Ann

ual P

erce

nt C

hang

e

Real GDP Percent Change Food CPI Percent Change*2010 forecasts

February 18, 201014

GDP Growth and Food Inflation Trends

Average Growth Rate (5) 1930-2009: GDP 3.4, Food CPI 3.4

1930-1949: GDP 3.7, Food CPI 2.6 1950-1969: GDP 4.3, Food CPI 2.0 1970-1989: GDP 3.2, Food CPI 6.3 1990-2009: GDP 2.5, Food CPI 2.8

February 18, 201015

GDP Growth and Food Inflation Lags

1-Year Lag Correlation Patterns 1930-2008: 0.26

1930-1949: 0.27 1950-1969: 0.41 1970-1989: 0.35 1990-2007: 0.08

2-year Lag Correlation Patterns 1930-2008: 0.05

1930-1949: 0.04 1950-1969: 0.05 1970-1989: 0.36 1990-2006: 0.08

February 18, 201016

50

100

150

200

250

1980

M1

1982

M1

1984

M1

1986

M1

1988

M1

1990

M1

1992

M1

1994

M1

1996

M1

1998

M1

2000

M1

2002

M1

2004

M1

2006

M1

2008

M1

2010

m1

Food commodity price index

2005 Index = 100

Source: International Monetary Fund: International Financial Statistics

Food commodity prices down 22% from the 2008 peak, but still up 39% since January 2006

77% increase at peak

February 18, 201017

0

50

100

150

200

250

300

Jan 1992 Jan 1996 Jan 2000 Jan 2004 Jan-08

Crude oilAverage of all comodities

Food commodity index

Index: 2005 = 100

Prices of Many CommoditiesRose Even More

Source: International Monetary Fund: International Financial Statistics

+ 130 %

+ 330 %

+ 585 %

February 18, 201018

0

50

100

150

200

250

300

350

400

450

500

550

600

Jan-90 1992M1 1994M1 1996M1 1998M1 Jan-00 2002M1 2004M1 2006M1 Jan-08 'Jan-10

CornSoybeansWheatRiceFood commodity index

Index: 2005 = 100

Volatility in food commodity prices

Source: International Monetary Fund: International Financial Statistics

February 18, 201019

Wal-Mart Supercenter Store Count

0

500

1000

1500

2000

2500

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Number of SupercentersSource: Wal-Mart Annual Reports 1997-2009

February 18, 201020

Expenditure Shares for Nontraditional Food Stores Continue to Rise

0%

20%

40%

60%

80%

100%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Traditional Retailers Nontraditional RetailersSource: ERS Calculations of ACNielsen Homescan Data

February 18, 201021

Expenditure Shares for Nontraditional Formats 1998-2008

0

2

4

6

8

10

12

14

16

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Expe

nditu

re S

hare

(Per

cent

)

Warehouse Clubs SupercentersMass Merchandisers Other

February 18, 201022

Research Project: Pass-through of Commodity and Input Cost Changes to Retail Food Prices

Objectives Model the magnitude of pass-through

Identify mitigating factors Identify differences across food groups

Estimate time to pass-through by food category

February 18, 201023

Data Monthly Change in PPI and CPI for Ag,

Energy and Food Items Retail Foods Related Farm and Wholesale PPIs Crude Oil and Gasoline PPIs

Grocery Store Wage Data (Current Employment Statistics)

Time Period: 1972-2008

February 18, 201024

February 18, 201026

Preliminary Results for Pass-Through of Farm and Wholesale Prices to Retail Prices

1 month31-52%29-39%Farm to Wholesale

Beef

1-4 months14-15%4-10%Wholesale to Retail

1-2 months33-46%6-27%Wholesale to Retail

1-2 months28-29%11-12%Farm to Wholesale

Bread

Time for majority of response to

occur

Cumulative 6-month pass-

through

Single period pass-through

February 18, 201027

Other Pass-Through Findings Pass-through from farm to wholesale prices are

generally symmetrical, both for short term and long term adjustments

Retail responses to wholesale price changes appear to have asymmetrical tendencies (in terms of the timing and size of response)

Price responses are stronger through the beef production chain than that of bread

February 18, 201028

Food inflation projected to accelerate in 2010, but close to historical average

Annual Percent Change in CPI for Food

2.6 2.2 2.1 2.33.2

1.8 2.2

3.42.4 2.4

4

5.5

1.82.5

3.5

0123456

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Low20

10 H

igh

February 18, 201029

Why?

2008 Higher commodity costs (corn, wheat, soybeans, etc.) Higher energy and transportation costs Increased U.S. exports due to weaker dollar/growing

global demand

2009 Food commodity costs down from summer 2008 highs Energy prices down Domestic and global demand weakens

2010 Recovering domestic and global economy Renewed energy and commodity price pressures

February 18, 201030

Percent Change in Food CPI (a)

1.7

2.3

-2.0

-1.0

0.5

3.5

1.8

2009Items 2007 2008 Forecast 2010

All Food 4.0 5.5 2.5 to 3.5

FAFH 3.6 4.4 2.5 to 3.5

FAH 4.2 6.4 2.5 to 3.5

Beef 4.4 4.5 1.0 to 2.0

Pork 2.0 2.3 1.0 to 2.0

Other Meats

2.3 3.1 2.5 to 3.5

Poultry 5.2 5.0 1.0 to 2.0

February 18, 201031

Percent Change in Food CPI (b)

-14.7

5.6

2.3

-6.4

3.6

0.5

1.8

2009

2.0 to 3.0

3.5 to 4.5

3.0 to 4.0

2.5 to 3.5

3.5 to 4.5

2.5 to 3.5

2.5 to 3.5

Forecast 2010Items 2007 2008

All Food 4.0 5.5

FAH 4.2 6.4

Fish 4.6 6.0

Dairy 7.4 8.0

Fats and Oils 2.9 13.8

Sugar + Sweets 3.1 5.5

Eggs 29.2 14.0

February 18, 201032

Percent Change in Food CPI (c)

1.9

3.2

6.6

-3.4

-6.1

0.5

1.8

2009

2.5 to 3.5

3.0 to 4.0

3.0 to 4.0

3.0 to 4.0

3.0 to 4.0

2.5 to 3.5

2.5 to 3.5

Forecast 2010

Items 2007 2008

All Food 4.0 5.5

FAH 4.2 6.4

Fresh Fruits 4.5 4.8

Fresh Vegetables 3.2 5.6

Processed F + V 3.6 9.5

Cereals + Bakery 4.4 10.2

Nonalcoholic Bev. 4.1 4.3

February 18, 201033

Caveats Food commodity volatility

Food ~ Energy Connection

Global demand for U.S. exports

Duration of recession Consumer demand for food Post-Recession Inflation?

February 18, 201034

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

2005 2006 2007 2008 2009 201020

40

60

80

100

120

140

Corn Crude Oil

Crude Oil and Corn Price Trends

February 18, 201035

Data Resources for Food Price Trends ERS CPI Forecastshttp://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm

BLS Average Price Datahttp://data.bls.gov/PDQ/outside.jsp?survey=ap

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

BLS CPI and PPI Datahttp://data.bls.gov/PDQ/outside.jsp?survey=cuhttp://data.bls.gov/PDQ/outside.jsp?survey=wphttp://data.bls.gov/PDQ/outside.jsp?survey=pc

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

February 18, 201036

Contact InformationEphraim Leibtag, [email protected]

202-694-5349

For more information, see http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/

February 18, 201037

Motivation- an Egg Example

$0.00

$0.50

$1.00

$1.50

$2.00

2002 2003 2004 2005 2006 2007 2008

Farm-Level Price Wholesale Price Retail Price

Sources: USDA, BLS

February 18, 201038

Total world grain & oilseedsStocks and stocks-to-use ratio

0

200

400

600

800

1970 1975 1980 1985 1990 1995 2000 20050%

5%

10%

15%

20%

25%

30%

35%Ending stocksStocks / Use

Million metric tons Supply / Use (%)

Source: USDA PS&D Database

February 18, 201039

Previous Research Results Summary Food and energy commodity price changes to

farm and wholesale prices Time: 2 to 9 months Pass-through: 2 to 41 percent depending on the product

in question.

Farm and wholesale prices change to retail prices Time: 1 to 6 months Pass-through: 2 to 18 percent.

Implies that commodity price changes take 4 to 27 months to pass through to retail prices and are passed through at rates ranging from less than one-half percent to nearly 7 percent.