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.
 

Thanksgiving Likely Less Expensive This Year

Next week is Thanksgiving, and it seems as suitable a time as any to take a look at changes in food prices.  I turned to the Bureau of Labor Statistics (BLS) data to investigate how prices of frozen turkey have evolved over time in the month of November.  The BLS hasn't yet reported retail prices for the month of November (or for the month of October for that matter), but nonetheless I can project this year's November turkey price based on past correlations between prevailing prices in September and November.  

As the above table shows, I'm projecting the price this November for a 20lb turkey to be $29.92, which is slightly less than last year but similar to 2014 and 2015.  By and large, one of the stories of turkey prices (and poultry more generally) is how stable prices have become over time.  This can be seen more dramatically by comparing turkey prices with the prices of other meats.  

My family isn't a big fan of turkey.  We often opt for steak.  The figure below shows past and projected November prices for turkey and beef steak (on a $/lb basis).

Prices for steak have increased more than a dollar per pound in both real and nominal terms over the past 20 years; however, turkey prices have hovered around $1.45/lb in real terms for the past two decades, which a slight up-tick in 2013.  Projected prices for steak this November are within a nickle per pound of where they were in November 2016.

If you're considering whether to have turkey or steak, another interesting comparison is the ratio of beef steak prices to turkey prices.  This ratio tells you how many pounds of turkey can be purchased for each pound of steak for the same budget.    

In November 2015, one could purchase about 5.5lbs of turkey for each pound of beef steak for the same total cost.  This year, I'm projecting that a consumer can only buy 4.88 lbs of turkey for each pound of beef steak.  That is, steak is projected to be relatively less expensive than turkey was in 2015 (though slightly more expensive than last year in 2016).  

Of course, a Thanksgiving meal consists of more than just turkey or beef.  Thus, it might be useful to compare overall how expensive food is this November compared to non-food items.  Using BLS data on price indices for food at home and non-food items, I calculated the change in cost of food at home relative to non-food over time.  

Compared to the base year, which I set to 1998, November prices of food at home rose at a slower rate than November prices of non-food items (i.e., food at home became less expensive relative to non-food items).  That pattern reversed course in 2008, when food prices began increasing at a faster rate than non-food prices. 

In 2016, and I'm also projecting for 2017, food at home has again started becoming less expensive relative to non-food items.  So, this Thanksgiving, be a good economist, buy fewer non-food items, and eat well!  

Agricultural Productivity and Food Security

There are two competing narratives about the future of food.  One is that the world population is growing and we need to increase agricultural productivity to "feed the world".  The other argument is that we don't need to produce more food - we already produce enough food to feed the world and our problems are really more about distribution than production.  Folks in the later camp often advocate for lower-productivity forms of agriculture that they perceive to have health or environmental benefits.  Like most arguments, there are elements of truth to both sides.  

As a proponent of improved agricultural productivity (which, I've argued is the key metric to improved sustainability), it bears asking: if a country's agriculture is more productive are it's people better fed?  

To delve into this question, I combined two data sets.  The first is a measure of a country's agricultural productivity from the World Bank in the year 2015.  In particular, they calculate for a large number of countries, the agricultural value added per worker.  In their words:

“Agriculture value added per worker is a measure of agricultural productivity. Value added in agriculture measures the output of the agricultural sector (ISIC divisions 1-5) less the value of intermediate inputs. Agriculture comprises value added from forestry, hunting, and fishing as well as cultivation of crops and livestock production. Data are in constant 2010 U.S. dollars.”

By this measure, the most productive countries are Slovenia, Singapore, Norway, France, Lebanon, Canada, New Zealand, Finland, and the United States, each of which produced more than $80,000 in agricultural value per worker in 2015 (measured in 2010 dollars).  Places like Malawi, Congo, Mozambique, Gambia, and Madagascar had some of the lowest productivity, with agricultural value added at around $400/worker or less.

Secondly, I collected data from the Global Food Security Index, a project ran by The Economist and supported by DuPont.  In their words:

“The Global Food Security Index considers the core issues of affordability, availability, and quality across a set of 113 countries. The index is a dynamic quantitative and qualitative benchmarking model, constructed from 28 unique indicators, that measures these drivers of food security across both developing and developed countries.

This index is the first to examine food security comprehensively across the three internationally established dimensions. Moreover, the study looks beyond hunger to the underlying factors affecting food insecurity. This year the GFSI includes an adjustment factor on natural resources and resilience. This new category assesses a country’s exposure to the impacts of a changing climate; its susceptibility to natural resource risks; and how the country is adapting to these risks.”

From this project, I pulled each country's overall food insecurity score (calculated in September 2017), which took on the values of around 30 for countries like the Congo, Madagascar, Chad, and Malawi, and was above 80 for countries like the U.S., the U.K., Ireland, and France.  Although they call this a measure of food insecurity, a higher score actually means a country is more food secure.   

So, what did I find?

There is a strong positive relationship between a country's agricultural productivity and how well it's people are fed and how food secure they are.  Fitting a logarithmic relationship between the two variables suggests that 82% of the variation in the food security scores across countries is explained by differences in agricultural productivity.  

Now, there are a lot of other things going on here as agricultural productivity is likely correlated with and affected by other factors affecting a country's general productivity and development, but the above figure might give pause to those arguing for lower productivity forms of agriculture. 

At the top end, the curve suggests one can sacrifice some productivity with only a small reduction in food security (going from $80,000/worker to $40,000/worker) reduces the food security scale from about 80 to 75.  But, at the lower end, going from, say, $20,000 in agricultural output per worker to $10,000/worker reduces the food security scale from about 70 to 60, and reducing productivity another $10,000 lowers the food security scale down to the 30s.  

Inequalities of Fat Taxes and Thin Subsidies

I was excited to see The Economist ran an article on my paper with Laurent Muller, Anne Lacroix, and Bernard Ruffieux, which appeared in the Economic Journal.  In typical Economist fashion, they didn't mention us by name, but here's their summary of our findings:

“The study found that the taxes and subsidies actually widened health and fiscal inequalities. Fat taxes meant the women on lower incomes paid disproportionately more for food—their habits changed less. They preferred to buy food they liked rather than what made nutritional sense. Taxing the food they eat most made the poor poorer.

Subsidies encouraged all income groups to buy more fruit and vegetables. But those on higher incomes proved more responsive and so benefited most. Interestingly, richer folk were also more likely to buy the subsidised healthy food and then spend the savings they had accrued on yet more healthy food. But poorer women, if they responded to lower prices, often used the money saved to buy unhealthy items or something else entirely. Once the nutritional price policies were applied, the average share of budget spent on healthy food actually increased for the better-off. ”

How Food Consumption Varies in Rich and Poor Countries

The American Journal of Agricultural Economics recently released an interesting paper entitled by Kenneth Clements and Jiawei Si.  Using previously unpublished data from the World Bank on consumption of 31 different food items in 150 countries, the paper has a lot of fascinating details about how food consumption differs in rich and poor countries, where find "substantial differences in per capita incomes lead to sharp, almost extreme, differences in consumption patterns."  I took some of the data in their paper to construct the graphs below.

First, their data strongly support "Engel's Law" in that the share of income spent on food declines the wealthier the country.  One of the poorest countries in their sample is the Central African Republic where consumers spend 64% of their income on food; in the richest countries like the U.S. and Bermuda, consumers spend less than 10% of their income on food.

The paper reviews some interesting details about how food expenditures differ across countries.  For example, the figures below show how consumers' food budgets are allocated in the richest quarter of countries as compared to countries in the lowest quartile of income.  I've drawn the pie charts so that they are roughly proportional to the quantity of food consumed in each country grouping.  Consumers in the lowest income countries consume about 77% less food than consumers in the highest income countries.  So, compared to richer consumers, poorer consumers are not only consuming a larger share of their income on food, they're eating less food.  

The other thing revealed in the graphs below is that richer consumers have greater diversity in their diets than poor consumers.  Just to give one example, Clements and Si estimate that consumers in richer countries spend only 3.3% of their food budget on rice and other cereals and flours (this is part of the 14% for bread, rice, and cereals in the figure below), but consumers in poorer countries spend 23.7% on rice and other cereals and flours (this is part of the 29% for bread, rice, and cereals). Thus, poorer consumers diets are more concentrated in rice and cereals and is less diversified in other foodstuffs.  Of course dietary diversity is a key measure of the nutritional quality of consumers' diets.  Clements and Si estimate that the diets of the rich are 3.5 times more diverse than the poor's.  

They write:

“A more varied diet brings nutritional advantages and for most, diet diversity is valued in and of itself, if not an essential part of their life. As the diversity of the diet tends to increase with income, not only does the food share fall with higher incomes, spending is also likely to be spread more evenly over foodstuffs, providing a more balanced diet. Relatedly, higher incomes bring a shift away from lower-quality items, towards more expensive, possibly more tasty and nutritious foods.”

Clements and Si find other interesting consumption patterns, such as the following::

“we find considerable differences between pairs of countries. Higher incomes bring higher-quality food, but the overall elasticity is small: enhanced food quality can only be achieved with substantially higher incomes. Furthermore, better-quality food comes at a higher price, but interestingly, this cost, relative to lower-quality food, falls as we move from poorer to richer countries. The structure of food prices is thus regressive in its impact on the global distribution of real income. This effect is modest, however.”

The whole thing is here.