USDA: Why food commodity prices are rising

 
June 29, 2011 | by Alicia Kelso

In the restaurant industry, all eyes have anxiously been watching commodity prices, which have risen mercilessly by 60 percent since this time last year. While the agricultural commodity fluctuations are not uncommon, the recent increase coupled with already compromised consumer confidence has caused more unease than usual.

The U.S. Department of Agriculture released a report this week from its Economic Research Service titled "Why Have Food Commodity Prices Risen Again?" The report, penned by Ronald Trostle, Daniel Marti, Stacey Rosen and Paul Westcott, takes a look at the long-term trends that contribute to price increases in the market.

The recent price surge reflects a similar pattern from 2002-06 and 2007-08. It can be attributed, in part, to global population growth, an increased consumption of animal products worldwide, rising energy prices, depreciation of the U.S. dollar and a slower growth in agricultural productivity.

Short-term weather-related production shortfalls are also a culprit, particularly with grains and oilseeds.

Spikes are not unusual

Since January 2002, food commodity prices have been steadily rising. From 2002 through 2007, the monthly food commodity price index compiled by the International Monetary Fund rose nearly 50 percent.

The index then accelerated throughout the subsequent 18 months, increasing by 130 percent from the beginning of 2002. It came back down again by the end of 2008 before shifting back up into present time.

These bumps pale in comparison to the Economic Research Services' four-crop subset index, which looks specifically at wheat, rice, corn and soybeans. The subset index rose 226 percent from 2002-2008.

By June 2010, the four-crop subset had relieved some — dropping about 73 percent — and is now back up by about 70 percent.

This spike is different

According to the report, there are plenty of differences between the price increases that are happening now and the price increases from 2008. Namely, rice prices haven't budged as much as they did three years ago. However, that seems to be the only "good" news.

Global wheat stocks are currently much higher now and livestock plays a bigger role in the recent price increases. Sugar has been affected by the weather, nearly doubling in price since May 2010 and rising more than any other food commodity.

Coffee, tea, fish, wool and palm oil have also risen dramatically since 2010. These were all higher in spring 2011 than their previous peak in 2008.

Compounding the issue, nonagricultural prices are also up, including crude oil; although crude oil has fallen short of its peak in 2008.

Factors in the price increases

While higher crude oil prices, adverse weather patterns and a depreciated U.S. dollar have all contributed to fickle commodity prices as of late, a rise in population and global incomes have thrown a big wrench into pricing trends.

A resurgent growth of middle- and low-income countries such as China and India has played an important role in food demand and their economic growth has been met with an increase in consumption and greater global agricultural demand.

A consequence of rising global incomes and more diet diversification is a higher demand for meat consumption, which has been rising throughout the past 30 years. Poultry consumption has risen most rapidly, at about 3.5 percent per year, while beef consumption has stayed steady.

As meat consumption increases, demand for grain and protein feeds also goes up.

Another factor in world food commodity pricing has been changes in trade practices and policies. A perfect example is the Russian export ban on wheat, which has caused a huge pricing spike since August 2010. The ban was imposed because of drought-induced crop shortfalls and rising domestic prices, and has pushed the cost of wheat beyond $10 for numerous weeks on the Minneapolis Grain Exchange.

Implementing aggressive buying practices

The unpredictable nature of future commodity import needs has caused many importers to aggressively contract for additional imports, according to the USDA report. When the Russian ban affected wheat costs, for example, importers started to contract for larger volumes to meet their needs for a longer period of time. This caused outstanding sales, which were under contract but not yet delivered, to catapult above historic levels in the U.S. last summer.

By spring of 2011, there were more than 20 countries that had outstanding wheat sales more than 50 percent above average. In the U.S., 21 percent of the total outstanding wheat export sales had unknown destinations. This trend is predicted to continue, according to the report, until the world's supply of food commodities stabilizes.

The authors predict that when global supplies begin to decline in price, these importers will not purchase additional quantities and demand will be reduced for several months. This could lead to a greater drop in prices than anticipated.

Agricultural pricing difficult to predict, but some factors aren't going away

Until that happens, the USDA 10-year projections show price declines for major crops in the near-term. However, long-term prospects are predicted to remain a concern. Particularly, growth in global demand for agricultural products will keep grain prices high.

Weather patterns have become increasingly daunting, while trade policies continue to be adjusted and high energy costs have become a rule rather than an exception.

If energy costs continue to remain high, the cost of agricultural production, processing and transportation will trickle down through the supply chain and ultimately affect restaurant operations and consumers.

Photo provided by maartyn.


Topics: Business Strategy and Profitability , Equipment & Supplies , Financial Management , Food & Beverage , Operations Management , Trends / Statistics


Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine.
View Alicia Kelso's profile on LinkedIn

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