Effects of lower commodity prices on food consumers

Yesterday, CNBC ran a story about lower farm commodity prices

“As a strong U.S. dollar and bountiful harvest expectations weigh on agricultural commodities, wheat futures have fallen 11 percent this year while live cattle futures are down 10 percent. Meanwhile, soybeans are down 7 percent, corn is down 5 percent, and sugar futures have fallen by 12 percent—a sharp turnaround from just a couple of years ago, when a drought put severe pressure on crop yields.”

They asked me what this might imply for the food consumer.  Here's what I had to say.

“Still, Americans will not see an equivalent drop in the prices on supermarket shelves, at least not immediately.

”Agricultural commodities are an important component of food prices, but they often comprise a pretty small share of the overall food dollar,” commented Jayson Lusk, a professor of agricultural economics at Oklahoma State University.

Lusk says that the percentage of food prices comprised by the raw materials ranges from as high as 40 percent for beef, to 10 percent or lower for highly processed food products such as those made from corn, wheat and soybeans.

In other words, a 10 percent moves in wholesale oat, sugar, and corn price probably won’t impact the price you pay for a box of Lucky Charms.

Still, “20 to 30 percent [of the overall price made up by agricultural products] does matter, and to the extent those prices fall, we should see lower food prices,” Lusk said.”

and

“Taking the broader view, the story for consumers is distinctly positive.

”Americans spend 10 percent of their disposal income on food, which is about the lowest in the world, and lower than at any time in our nation’s history,” Lusk said. “We’re seeing a very long-term trend toward more affordable food for many.””

Distributional Effects of Selected Farm and Food Policies

The Mercatus center released a report yesterday that I wrote on the farm-to-consumer effects of food policies, focusing crop insurance subsidies, SNAP, and ethanol promotion.  

The federal government subsidizes the premiums farmers pay for crop insurance - often around 65% of the premium.  What effect does that have on farm and food prices?  Here's a summary:

“Federal crop insurance is a textbook example of concentrated benefits and diffuse costs. Most food producers and consumers receive some benefit from crop insurance through the direct subsidy and decreased food prices. Those who stand to benefit most from the program are best able to convince legislators to continue it. But taxpayers as a body, less able to advocate for their own interests, suffer a net loss as money is transferred from the pockets of all taxpayers through higher taxes to the pockets of producers and consumers of food, meaning people pay higher taxes rather than choosing to pay higher grocery bills. The $932 million in projected savings if federal crop insurance were ended represents the deadweight loss of subsidies: the economic cost of transferring money from many to some and the cost of the lobbying necessary to maintain the system.

Some farmers win from subsidies while other farmers lose. While farmers in the plains states that produce the bulk of the food insured by the government would lose money if the program were eliminated, farmers in western states such as California, Oregon, and Washington would benefit because products such as fruit, vegetables, and nuts, which are not heavily subsidized, would no longer be disadvantaged.

Consumers pay more in taxes rather than more at the grocery store. Consumers would pay higher prices for food if subsidized crop insurance were removed, but the benefit to taxpayers more than compensates for the higher food prices. Taxpayers have to pay about $1.80 for every $1 in lower food prices owing to federal crop insurance.”

I also find that SNAP (or food stamps) is a very inefficient form of farm support: for every dollar spent by taxpayers, farmers benefit by only one cent.  A reduction in demand for corn-based ethanol would reduce food - especially meat - prices, while hurting corn producers.  

Update on Meat Prices

It's been a little less than a year since I last weighed in on the change in  meat prices.  So, what's been happening?  

Below is a graph of retail prices from the  Bureau of Labor Statistics over approximately the last five years (from January 2010 to February 2015).

Beef prices (ground beef and steak) have continued their rise, while pork products (pork chops and ham) have come down a bit off their highs in the summer/fall.  Chicken prices have remained relatively steady.  

It is a little easier to focus in on changes by looking at the following graph, where I've plotted the changes in each meat's price relative to its price in January 2010 (and multiplied by 100).

Compared to five years ago, ground beef prices are 54% higher (an annual increase of over 10%) and steak prices are 43% higher (an annual increase of 8.6%).  Pork chop and ham prices are 30% and 39% higher than they were five years ago despite the recent declines.  Chicken prices today are only about 10% higher than 5 years ago (experiencing annual increases of only 1-2%).  

On at least a couple of occasions (here and here), I've discussed the driving factors behind these price changes, and none of that has really changed.  The fact that pork prices are now falling and beef isn't is likely due to the shorter life-cycle of pork relative to beef.  A sow can produce two litters per year (with about 9-12 pigs/litter) and those baby pigs are big enough for our dinner plates in about half a year.  By contrast, a cow will typically have one calf in a year, and it takes a little less than 2 years before that calf becomes our hamburger.  Both hog and beef producers want to produce more animals to take advantage of the higher prices (a move that will eventually bring down prices), but biological lags mean pork producers will be able to respond more quickly.  

So, when will beef prices begin to come down?  If biological lags are the answer, I'd say wait about a year and a half.    

TSE Economist weighs in on nutrient taxes

In the most recent issue of the Toulouse School of Economics (TSE) Magazine (pg 8) features some work by Vincent Requillart and Celine Bonnet on ability of nutrient taxes (like soda taxes) to fight obesity. 

Soda and sugar taxes don't always have the anticipated effect:

“The fact that we take into account the way the industry and retailers react via their pricing decisions. Most research assumes that the tax is passed on to the consumer. There’s no reason that should be the case! Firms are not passive, they develop strategies. They can raise prices more than is strictly necessary to cover the tax or, on the contrary, reduce their profit margins so as to maintain their sales.”

The point out that the effects of a sugared-soda tax are small, and that the actual policy passed in France (taxing all sweetened drinks - even those with artificial sweeteners) would not be expected to reduce weight.

“Taxing all drinks, be they sugar-sweetened or light, is counter to health recommendations. In practical terms, the tax implemented does not reach its goal of reducing sugar consumption. It acts primarily as an instrument to increase the State’s budget revenue.”

They seem to favor voluntary arrangements between food companies and the government to reduce sugar and salt content.  Even still, in places like the UK, where such an approach has been taken, the effect appears to be virtually nil.

“Having said that, despite all the measures implemented, obesity has not been eliminated. ”

One of the challenges is the complexity of it all

“ In the case of food, defining what is good and what is bad when dealing with a large number of nutrients, is complex.What’s more, eating habits change very slowly.”

For a more in depth and academic treatment of the topic, you might check out some of the published work by these authors.

How do consumers respond to rising food prices?

That's the question asked in this working paper by Rachel Griffith, Martin O’Connell and Kate Smith.  The abstract: 

“Over the Great Recession real wages stagnated and unemployment increased. Concurrently, food prices rose sharply, outstripping growth in food expenditure, and leading to a reduction in calories purchased. This has led to concern about rising food poverty. We study British households to assess how they adjusted to changes in the economic environment. We show they switched to cheaper calories; implying food consumption was smoother than expenditure. We use longitudinal data to quantify the way households lowered their per calorie spending, and show they done this in part by increasing shopping effort, and without lowering the nutritional quality of their groceries.”

When we feel the pinch, we can substitute away from more expensive to less expensive foods.  But, we can also increase the effort we expend in finding better prices.  In short, our time is a valuable commodity that we treat like other economic goods.  

That fact was also emphasized in a paper by Broda, Leibtag, and Weinstein in the Journal of Economic Perspectives in 2009.  They used some creative methods to ask the question: do the poor pay more or less than the rich?  They write:

“In this paper, we circumvent the problems of previous studies by using a dataset that contains actual purchases of around 40,000 households collected by Nielsen. By focusing on the actual prices paid by households, we show that poor households systematically pay less than richer households for identical goods. The poor pay less in part because they shop in cheaper stores and in part because they pay less for the same goods even in the same store. This latter effect probably arises because poorer households are more likely than richer households to buy goods on sale, even in the same store. We also confirm that the poor shop more in convenience stores—where prices are 11 percent higher than in traditional grocery stores—but show that this effect is dominated by their higher share of expenditure in supercenters where prices are 10 percent lower than in grocery stores.”

Note that these authors aren't comparing apples to oranges.  They compare the prices paid by rich and poor households for exactly the same goods.  

When asked how consumers respond to higher prices or lower incomes, so often we economists refer to indifference curves and budget constrains or do a fair amount of hand-waving.  Yet, as these studies show, reality is more complex.  We can use our time to find better prices, or we can alter out consumption bundle to provide the same nutritional quality in a less expensive fashion.