2018 Agricultural Outlook

The latest edition of the Purdue Agricultural Economics Report has 12 articles that provide outlook on the forthcoming year.  The effort was led by Chris Hurt, who provides outlook on the overall agricultural economy in addition to specific pieces on hog, corn, and soybean outlooks.  Larry DeBoer provides an overall macro-economy outlook, Russell Hillberry focuses on trade, Roman Keeney provides some perspective on the next Farm Bill, Jim Mintert provides a beef cattle outlook, and Nicole Widmar and Courtney Bir look at dairy and butter trends.  The report is rounded out with pieces by Micheal Langemeier and Craig Dobbins on the future of crop costs and returns, rental rates, and land values.  

I chipped in with a short piece on food prices.  Here is what I had to say (including an extra bonus graph that didn't make the final report).  

Last year, 2016, proved to be a record setter, at least in recent history, for food price changes.  For the first time in at least three decades, the annual consumer price index for food at home fell.  Driven in part by the fall in agricultural commodity prices, prices for food at home fell 1.3% from 2015 to 2016. While prices for food eaten away from home increased 2.6% from 2015 to 2016, this change remained below the twenty-year historical average increase of 2.7%.  

Where are retail food prices heading in 2017 and beyond?  The fall in prices from food at home appears to have abated.  Through the first ten months of 2017, prices for food at home increased every month save one (June), but the increases were quite modest – averaging a tenth of a percentage increase each month.  Increases in prices of food away from home through the first ten months of 2017 are similar to that observed during the same time in 2016.  The USDA Economic Research Service forecast overall food price inflation of 1% to 2% in 2017 and 1.5% to 2.5% in 2018, with most of the increases coming from changes in prices of food away from home.

The figure below shows the year-over-year monthly changes (for example, the percent change from September 2016 to September 2017) in prices of several food and non-food items.  The year-over-year change in the price of food away from home has hovered around 2.5% for the past four years.  By contrast, the year-over-year changes in prices of food at home were largely negative in 2016, but have subsequently trended positive.  Similar, though more dramatic, patterns are observable for prices of meat and for fruits and vegetables.  Despite the recent increases in prices of food at home, meat, and fruits and vegetables, the increases remain quite modest.  In-fact, the year-over-year increases for each of these food items remain below the increases in prices of non-food items, which have averaged about 2% since mid-2016.  It is important to make comparisons to changes of non-food prices because it is the relative changes that drive consumer purchase behavior.  If the price of non-food items increases at the same rate as food items, one wouldn’t expect much change in consumers’ food purchases. 

It is useful to place these recent changes into a broader historical perspective, as in the following figure, which shows the percentage price changes relative to January 2007.  Over this more than decade-long stretch, the price of food away from home increased at a steady pace to a point to where prices are now 33% higher than a decade ago.  From 2007 through 2014, the increase in prices of food at home largely tracked that of prices away from home, but in more recent years, the two price series have diverged, and now food away from home is only about 22% higher than was the case in January 2007. While low commodity prices have helped push down food price inflation at home, the same phenomenon hasn’t held true for food away from home, perhaps due to the greater contribution of non-commodity inputs, such as labor and real estate, that factor into prices of food away from home.  

These trends suggest that, to the extent commodity prices remain low, we can expect small increases in prices of food at home in the future, but prices of food away from home may nonetheless continue increasing at historical rates.
 

Food Environment or Food Preferences?

“The public health literature has documented that lower income neighborhoods suffer from lower availability of healthy groceries and that lower-income households tend to eat less healthfully. In some circles, this relationship has been taken as causal, with significant policy attention devoted to improving access to healthy groceries in low-income neighborhoods.”

That's from a new paper by Hunt Allcott, Rebecca Diamond, Jean-Pierre Dubé.  This is one of the most rigorous investigations I've seen of the causal impacts of the "food environment" (in this case, the presence of grocery stores and movements of people into "healthier" neighborhoods) on dietary choice. 

What did they find?  From the conclusions:

“Entry of a new supermarket has a tightly estimated zero effect on healthy grocery purchases, and we can conclude that differential local access to supermarkets explains [no more] than about five percent of the difference in healthy eating between high- and low-income households. The data clearly show why this is the case: Americans travel a long way for shopping, so even households who live in “food deserts” with no supermarkets get most of their groceries from supermarkets. Entry of a new supermarket nearby therefore mostly diverts purchases from other supermarkets. This analysis reframes the discussion of food deserts in two ways. First, the entire notion of a “food desert” is misleading if it is based on a market definition that understates consumers’ willingness-to-travel. Second, any benefits of “combating food deserts” derive less from healthy eating and more from reducing travel costs.”

and

“we find that moving to an area where other people eat more or less healthfully does not affect households’ own healthy eating patterns, at least over the several year time horizon that the data allow. ”

The authors end by concluding that policy efforts to alter local food supplies are likely to be ineffective.  Their data strongly supports this conclusion.  They recommend, instead, to use public policy to improve health education.  I'm surprised they make this recommendation because their study provides no indication that more education would be a cost-effective intervention.  If anything, what their study shows is that economic development (turning low-income households into high-income households) is the most effective way to improve the healthiness of dietary choice.  

Hat tip to Alex Tabarrock at the Marginal Revolution blog who is highly skeptical of the food desert concept.  

Plant-based is the new local (Impossible Burger edition)

Back in 2007, Time magazine ran the following cover announcing, in essence, that local was the new organic.

Well local, has arrived and now it seems it's time to move on to something else.  Last night, I heard Randy Krotz, CEO of the US Farmers and Rachers alliance give a presentation, and as he talked he helped solidify some thoughts that have been rolling around in my head for a while. 

In short, forget local, eat "plant based."  "Plant based" appears to be the new local.  

Randy must have been prescient because, as it turns out, right after his talk, my son (who graciously agreed to attend the meeting with me) and I decided to stop for a burger, and lo-and-behold the joint offered the Impossible Burger.  This is the first time I've seen the plant-based burger - which used genetically engineered yeast to produce animal proteins - listed on a menu.  My son ordered the Impossible Burger, and I went with the good old-fashioned cow burger, which allowed a side-by-side taste test.  

Overall, I give the Impossible Burger high marks.  If we didn't know it was plant-based, I don't think we would have been the wiser.  My son thought it was quite good.  It is certainly 100% better than previous vegetarian burgers I've tried.  That said, there was just something about the beef burger that we thought tasted better - I suspect it was the animal fat.  Still, traditional animal-based protein suppliers have due cause for concern from this new competition.  That is, if these new technologies can bring down cost.  

The Impossible Burger was about a dollar more expensive (and about half the thickness) of the beef burgers on the menu, which prompted some discussion between my son and I about relative costs of animal- vs. plant-based proteins.  The ad on the table claims that the Impossible Burger uses 95% land, 97% less greenhouse gas emissions, and 74% less water than a beef burger.  If the Impossible Burger is using so many fewer resources, why is it more expensive?  Land is an enormously costly input.  Some of it may be that they are trying to recoup R&D costs or that they are exercising some price discrimination as they sell to higher income consumers.  At this point, it's hard to know, but if it is really the case that the plant-based burger uses substantially fewer resources, it should ultimately cost less than animal-based proteins.

All that is a way of pointing out that these sorts of plant-based burgers aren't a free lunch.  All those genetically engineered yeast have to "eat" something.  They require stainless steel fermentation vats, produce waste (that ironically is probably best used as feed for livestock), etc.  It will be interesting to see how cost-competitive they can become and how accepting consumers may (or may not be).          

Meat Taxes?

This morning I appeared on Fox Business Network with Varney & Co to discuss the idea of meat taxes (something proposed by many groups and authors - e.g., see this recent piece in Bloomberg).  The short segment is below.  It cut out before my last comment where I argued that efficiency is also good for the consumer because it helps bring down food prices.

Assorted Papers of Interest

• The Journal of Economic Behavior and Organization just published this paper I co-authored with Vincenzina Caputo and Rudy Nayga.  We argue that the choices survey-takers make depend not only on the prices used in hypothetical shopping choices in the survey itself but on people's perceptions about the level and variability of prices outside the survey.  We derive a conceptual model showing that when the variability (or uncertainty) about prices in "real life" increases, people are more likely to refrain from making any purchase at all.  The results stemming from our study, which manipulated information about the level and variability of prices outside the study, are broadly consistent with this hypothesis in addition to re-confirming the often-found loss aversion phenomenon (i.e., people are more sensitive to price changes above a reference point than below).
• In case you missed it, last month the Congressional Research Service released a report outlining the possible effects on agriculture of a US withdrawal from NAFTA.  The short summary is that if the US looses most favored nation status with Canada and Mexico, the overall effects are likely to be negative for US producers and consumers.  
• In the past couple months I've noticed a couple interesting papers suggesting new ways of learning about consumer behavior and welfare. 
  • The first is this paper by Robert Allen in the American Economic Review. Allen proposes doing away with the World Bank's "$1 a day" measure of poverty and instead proposes to measure poverty by calculating the least cost to attain an "adequate" diet given the particular prices and income in a given country.  His paper suggest people may be poorer than we thought they were. 
  • The second is this paper by Scott Schuh in Economic Inquiry who discusses a method to measure consumer expenditures based on records of daily authorizations made by different payment types (cash, check, or debit/credit card).  He finds significantly higher levels of spending with this method compared to other popular government methods of measuring consumer expenditures.  The results seem to suggest people may be spending more on food than we thought they were.