What Factors Affect Food Prices?

Anyone who’s taken a trip to the grocery store over the last year can attest to the fact that food prices are going through the roof. For instance, egg prices in the previous six months have gone sky-high. What factors affect food prices? Will consumers experience any relief?

Food price inflation comes from production and market factors affecting the price of goods on the shelf. Let’s unpack these elements in detail.

What Factors Affect Food Prices?

Production Inputs

Fertilizer

Crops like vegetables and grains rely on fertilizer to improve yield. Farmers don’t harvest as much food without fertilizer, and there’s less on the shelf. The biggest fertilizer producers all come from Ukraine and surrounding countries. The Russian-led war on the country dramatically curtails the supply while demand remains sky-high, increasing the cost of this input.

Water

Water is scarce in many parts of the world. With climate change making once-wet areas dry wastelands, water costs for vegetable and grain producers and farmers involved in animal husbandry are soaring.

Fuel

The inflationary effect on fuel and energy due to the war in Ukraine and declining production from the OPEC cartel places pressure on the oil supply/demand balance, inflating the price. The lack of refinement capacity globally also makes petroleum products increase in price. Farmers use fuel for managing their crops, and logistics companies use it to get goods to market, transferring the rise in costs to the consumer.

Labor

Wage inflation is a byproduct of too much demand in the market and a baseline indicator of higher inflation in other markets, such as energy and consumer staples. Companies have to compensate for paying workers more by raising prices on the shelf.

Weather

As mentioned, the effects of climate change affect food production across the world. For instance, the usually bumper crops produced by nations like Brazil struggle under drought conditions. Less supply and increasing demand led to increases in food commodity prices worldwide.

Disease

The recent bird flu epidemic is an example of how diseases affect consumer prices in grocery stores. We’ve seen the prices of eggs go through the roof in 2022 and 2023, with minimal relief in sight. The Chinese experienced the same thing with the outbreaks of Swine Fever in recent years, pushing up the price of pork products for the consumer.

Market Inputs

Demand

Inflation in food prices occurs when we see an excess of demand with not enough supply. An example of this is the cost of sunflower oil across the planet. The majority of the sunflower oil supply comes from Ukraine. With the war going on, the Ukrainian farmers can’t get the sunflower oil to market, creating an imbalance in supply and demand, leading to skyrocketing prices for this food-based commodity at the grocery store.

Supply Chains

The world is more connected than ever before. We rely on delicate supply chains to get food from the farm to your fork. The COVID pandemic saw a breakdown in global supply chains, creating havoc at ports worldwide. These supply chain issues result in imbalances in supply and demand in the market and rising costs of consumer goods.

Currency

The US Dollar continues to lose purchasing power due to the Federal Reserve’s endless money printing. During COVID, the Fed printed $2 Trillion in an effort to help Americans survive being kept at home and out of a job. However, according to Milton Friedman, inflation is always the result of a monetary expansion. As inflation climbs, prices of goods rise with it, resulting in higher grocery bills for Americans and consumers around the globe.

Rising Rents

Inflationary pressures and failing bond markets and banks mean the cost of debt becomes more expensive, resulting in rising rents across all developed economies, including the United States and Europe. Business owners, such as restaurant and store owners, must transfer these additional costs to the consumer.

More information: https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/

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