Food Cost Inflation: Impacts from Producers to Processors to Consumers
The February CPI for food was 7.9% and the February PPI for food was 13.7%. These inflationary pressures are impacting producers, processors, and consumers, and they are being driven by a wide variety of factors. These February inflation indicators do not yet include the current impacts and potential impacts of the Russia Ukraine situation.
The February CPI was 7.0%, with food at 7.9%. Food at home increased 8.6% and food away from home increased 6.8%. In addition, to energy cost increases, consumers are feeling direct impacts to food costs. The lesser increase in the cost of food away from home may indicate the restaurant business and other sectors that provide food for away from home consumption, may be experiencing tightening margins while operating in industries that already have tight gross margin performance.
The February PPI showed an overall 10.0% increase in prices, with food reporting a 13.6% increase. The costs of transportation and warehousing reported a 16.6% increase, which outpaced the increased cost of food, with the cost of energy continuing to lead the increases at a reported 33.8%. It should be noted that transportation and warehousing and energy are integral to the delivery of food products to consumers; therefore, the inflationary pressures are continuing upward.
To understand the food and agribusiness sector and the inflationary challenges being felt, it is important to know certain problems and challenges being faced throughout the supply chain from producer to consumer, whether the consumer is eating at home or eating out.
As of March 29, 2022 the USDA showed 79 confirmed sites of avian flu in eighteen states. The states with infected flocks are primarily in the Midwest and Eastern portions of the US. The last time avian flu hit the US was from December 2014 to June 2015, with 50 million chickens and turkeys dead or destroyed. During this outbreak egg prices were more significantly impacted than poultry prices.
The USDA’s website reporting 2022 Confirmations of Highly Pathogenic Avian Influenza in Commercial and Backyard Flocks reported nearly 17 million birds in 79 confirmed cases have been identified. The first reporting was February 8, 2022, with the majority of the cases in terms of birds affected reported in March. The largest flock impacts were in Delaware on 2/22/22 with 1,146,937 birds impacted, Iowa on 3/28/22 with 1,460,030 birds impacted, Iowa on 3/17/22 with 5,347,511 birds affected, and Wisconsin on 3/14/22 with 2,757,768 birds affected. By state, Iowa had the largest affected bird count at 8,105,378 followed by Wisconsin with 2,757,768 and Delaware at 1,568,737.
The chart below summarizes the per state impact as of March 29, 2022.
Avian flu impacts the price of eggs and poultry.
The chart below shows the average price of grade A large eggs as tracked by the US Department of Agriculture and reported by the St. Louis Federal Reserve Bank. During the previous avian flu outbreak in 2014/2015 the price of eggs peaked at $2.966 in September of 2015 after beginning 2014 at $2.008, for a 47.7% increase to consumers. The current price data is only available through February 2022, therefore additional increases in egg prices should be anticipated in March of 2022 and forward.
The next graph shows the price changes in poultry (chicken), whole body price index as published by indexmundi sourced from the USDA Market News from January of 2014 to January of 2022. During the previous avian flu outbreak the price of chicken decreased from $2.11 per kilogram in January of 2014 to $1.69 per kilogram in September of 2015, for a 24.9% decrease in the price of chicken.
In 2022 the impact of the avian flu may be much different. The price of corn was $5.03 per bushel in January 2014 and $4.21 per bushel in September of 2015 compared to $7.2625 per bushel today. The costs to feed chickens to produce meat or eggs has increased significantly. While egg prices increased and chicken prices did not during the 2014/2015 avian flu outbreak, the expectation is that both egg and chicken prices will increase this time. NPR reported that the USDA statistics show the price of chicken breasts in the week of March 26, 2022 were $3.63 per pound, compared to $3.01 the week earlier and $2.42 during the same time in 2021.
Food Oil Pressures
Ukraine and Russia account for 75% of the world’s sunflower exports. The sanctions on Russia and the war’s impact on everyday life in the Ukraine indicate supply disruptions should be expected. Food oil supplies have also been impacted by the labor shortage in Malaysia because Malaysia is the world’s number two palm oil producer. Canada’s drought impacted canola crops and the drought in Brazil and Argentina impacted the soybean harvests.
The most used cooking oils are palm, soybean, rapeseed and sunflower, and all prices have increased. For example, according to tradingeconomics.com palm oil was $4,241 on December 17, 2021 and rose to $5,703 on March 9, 2022, which is a 34.5% increase. The chart below is from tradingeconomics.com and shows palm oil prices over the past year.
According to sunflowernsa.com, the price of sunflower seeds has increased at the North Dakota and Colorado crushing plants from $31.00 per cwt as of January 1, 2022 to $38.00 per cwt as of March 30, 2022, which is a 22.5% increase.
The oil products are used throughout the food processing sector and will continue to contribute to the inflationary pressures on food prices.
New Animal Rules
In late January 2022 the Superior Court for Sacramento County in California halted the enforcement of Prop 12, which was to take effect on January 1, 2022. The California Department of Food and Agriculture is over two years late in finalizing regulations that outline what pork producers will need to do to comply with Prop 12. Those final regulations were supposed to be completed by September 19, 2019 and have not been completed as of today. The Court ruling changed the enforcement date to 180 days after the final rules go into effect. The petitioners for the pork industry had asked for 28 months.
Based on this ruling, pork producers would have only six months to comply with the final rules. As a result, many pork producers are evaluating changing their facilities or not selling in California. Please refer to (article we wrote previously) for more background on this topic.
Egg producers and veal producers have already been impacted by regulations dictating pen or cage size.
While Prop 12 is specific to California, the rules that California passes tend to impact the costs to produce across the US and result in increased production costs.
Food CPI Specifics
Looking further into the February CPI specifics related to food prices shows that while food prices overall increased 7.9%, the price of meats, poultry, fish and eggs increased 13.0%, the price of fruits and vegetables increased 7.6%, the price of nonalcoholic beverages & beverage materials increased 6.7%, and the price of other food at home increased 8.2%. The next chart shows the February CPI data for food.
In reviewing this chart, it is clear food prices are increasing for food at home, and sources of protein are leading the growth in prices.
Additional Food Price Challenges
Food prices are certainly being impacted by the labor issues and the supply chain issues currently being felt across the economy.
The February Bureau of Labor Statistics data shows the number of unemployed persons available for each job opening is 0.6. This means that the there are fewer people available to fill jobs, than there are businesses looking to staff positions. Since May of 2021 there have been 1.0 or fewer people available to fill open jobs.
This does not consider geographic differences and skill set issues. While the February US unemployment rate was 3.8%, the unemployment rates by state range from above 5.0% to below 3%. Depending on the location of a business, the business may be more negatively impacted by labor availability issues.
An indicator of the skill set issues would be unemployment by educational level attained. While the unemployment rate for individuals with less than a high school diploma peaked in April of 2020 at 21.1%, that rate dropped to 4.3% in February of 2022, and the February 2022 unemployment rate for individuals with a high school diploma was 4.5%. Businesses are reaching further down the educational level attained chain to fill positions.
The labor shortages, both people and skill sets, are expected to continue, and rising labor rates will further impact upward inflation trends.
The supply chain pressures are continuing, with transportation and warehousing costs increasing 16.6% based on the February PPI. The trucking costs and container freight costs are continuing to increase. The containers from China/Southeast Asia to the West Coast of the US that cost $2,500 or less to ship in 2019 are priced at over $15,000 today. Trucking costs February 2022 over 2021 are up for all categories of trucks, with flat beds leading the increases at 34.8%.
The CPI for energy costs was 25.6% in February, and the PPI for energy costs was 33.8%. These price increases include gasoline, diesel, natural gas, electricity, and any other energy source businesses in the food supply chain need to operate and produce the foods consumers purchase for consumption at home or away from home. Rising transportation costs related to fuel may also impact the amount of food consumed away from home versus at home.
The Combination of Impacts
The combination of the labor issues, the supply chain issues, energy costs, and the specific food related issues outlined in this article, indicates that businesses operating in the food and agribusiness sector are experiencing tremendous stress and uncertainty today. Availability of labor with the necessary skills and availability of trucks and transportation resources when needed, at costs that can be sustainable, are problematic. Energy costs are increasing food production costs and the transportation of goods up and down the food supply chain. Irrespective of where a business operates in the food chain from producer to consumer, costs are increasing. This means each business will need to be thorough in its analysis of costs and contracts, and nimble in its response to issues as they present themselves.
The cost of food should be expected to increase further, and the impact on individual businesses will depend on their ability to pass costs along to the next user of their product in the food supply chain.