OUTLOOK FOR U.S. RETAIL FOOD PRICES AND INFLATION, 2012

Richard Volpe, Ph.D.Food Markets Branch

Food Economics DivisionERS-USDA

USDA Agricultural Outlook ForumFebruary 23, 2012

1

HEAVY FOOD PRICE INFLATION IN 2011

Beef Fats and oils Eggs Pork Fish and seafood0

2

4

6

8

10

12

10.29.3 9.2

8.5

7.1

Five Biggest Moving Major Categories

Perc

ent

Change,

2010-2

011

2• All food: 3.7%• Food-at-home: 4.8%

Source: BLS CPI Data, 2011

3

PERSPECTIVE:LONG TERM FOOD-AT-HOME PRICE INFLATION

0

2

4

6

8

10 8.1

4.62.8 2.8

4.7

Average Annual Percent Change in Food Price Inflation by Decade

1970s 1980s 1990s 2000s 2011

Source: BLS CPI Data, 1970-2011

CPI AND CPI FOR FOOD, 1970-2011

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-2

0

2

4

6

8

10

12

14

16

CPI CPI for Food

An

nu

al P

erc

en

t C

ha

ng

e

Source: BLS CPI Data, 1970-2011

4

FAH AND FAFH, 1970-2011

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

6.4

4.84.4

2.3

Food at Home

An

nu

al

Pe

rce

nt

Ch

an

ge

5

Source: BLS CPI Data, 1970-2011

FOOD, ENERGY, MEDICAL CARE, SERVICES 1990-2011

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-20

-15

-10

-5

0

5

10

15

20

25

30

CPI for Home Energy CPI for Motor Fuel CPI for FoodCPI for Medical Care CPI for Personal Services

An

nu

al P

erce

nt

Ch

ang

e

Source: BLS CPI Data, 1970-2011

6

SOURCES OF RETAIL PRICE CHANGES

Changes in Consumer DemandChanges in Retail Market Competition

Number of retailers in a marketType of retailers

Specialization

Changes in CostsCost of Goods Sold (Farm and Wholesale)

Regional VariationOperating Costs (e.g. Energy)

7

CONSUMERS’ FAH EXPENDITURE PATTERNS, 1999-2009

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.05

0.1

0.15

0.2

0.25

0.3

Fruit

Vegetables

Whole Grains

Refined Grains

Regular Meats

Fish

Sugary Drinks

NoCal Drinks

Sweet Packaged

Savory Packaged

Sh

are

of

To

tal

FA

H B

ud

ge

t

8Source: Nielsen Homescan Data, 1999-2009

CONSUMERS INCREASINGLY SHOP AT NONTRADITIONAL FORMATS FOR FAH

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Grocery

Drug

Mass Merchandiser

Supercenters

Club Store

Convenience

All other

Shar

e of

tota

l FA

H E

xpen

ditu

res

9

Source: Nielsen Homescan Data, 1999-2009

SPOTLIGHT: NONTRADITIONALS

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

Drug

Mass Merchan-diser

Supercenters

Club Store

Convenience

All other

Shar

e of

Tot

al F

AH

Exp

endi

ture

s

10

Source: Nielsen Homescan Data, 1999-2009

PPI FOR RETAIL GROCERY DEPARTMENT MARGINS, REVENUES MINUS WHOLESALE COST

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

An

nu

al

Pe

rce

nt

Ch

an

ge

Source: BLS PPI Data, 2001-2011

11

THE UPDATED FOOD DOLLAR

Marketing Share; 84.2%

Farm Share; 15.8%

Marketing Share: Post-farm receipts to food supply chain in-dustries

Source: A Revised and Expanded Food Dollar Series (2011), ERR114, Economic Research Service,

www.ers.usda.gov/data/FoodDollar/

Farm Share: Farmers’ receipts from sale of raw food commodities

12

WHERE A CONSUMER DOLLAR SPENT ON FOOD GOES

Food Processing; 18.6%

Farm and Agribusiness; 11.6%

Food Services; 33.7%

Energy and Transportation ; 10.3%

Packaging; 4.0%

Retail Trade; 13.6%

Finance and Insurance; 4.4%

Advertising, Legal, Accounting; 3.8%

Source: A Revised and Expanded Food Dollar Series (2011), ERR114, Economic Research Service,

www.ers.usda.gov/data/FoodDollar/13

ERS FOOD MARKETS AND PRICES RESEARCH

Leibtag & Kumcu (May 2011) examined importance of regional variation in pricesKey finding: fruit and vegetable prices vary

substantially across markets30-70% more expensive in highest-priced

markets as compared to lowest-priced markets

Implications for purchasing power of programs to improve food security, e.g. WIC 14

ERS FOOD MARKETS AND PRICES RESEARCH

Stewart & Blayney (Aug. 2011) study dairy price transmissionKey finding: Milk price fluctuations drive

dairy retail price changes, but incompletely and asymmetrically

Farm price increases passed on more quickly and completely than decreases

But no evidence of a widening of the farm-retail spread from 2000-2010 Due in part to retail competitive pressure

15

ERS FOOD MARKETS AND PRICES RESEARCH

Volpe (December 2011) examined prices by brandingKey finding: Competition within stores,

between NBs and PLs, drives prices and salesLowers prices and increases product variety

NB/PL price difference is fallingNB/PL competition is fiercest when market

competition is weak

16

ERS FOOD MARKETS AND PRICES RESEARCH

Okrent & Alston (2011) examined FAFH demandKey finding: FAFH demand much more

responsive to income-driven changes in consumption

Demands for healthful foods less price responsive than unhealthful foods

Strong substitutions and complements in demand among FAFH groups, important for any policy consideration

17

ERS FOOD MARKETS AND PRICES RESEARCH

Carlson and Frazao (forthcoming, 2011) compares prices across categoriesKey finding: How you measure the price of

food mattersSome other studies have shown that less

healthful foods are cheaper, as measured on a caloric basis

As measured by edible weight or portion size, the opposite is true: fruits, vegetables, grains, dairy are less expensive than foods high in saturated fats, added sugars, etc.

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2011-2012 FOOD INFLATION IS UNLIKELY TO APPROACH 2007-2008 LEVELS

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Low

2012 High

0

1

2

3

4

5

6

2.6

2.2 2.12.3

3.2

1.8

2.2

3.4

2.4 2.4

4

5.5

1.8

0.8

3.7

2.5

3.5

Annual Percent Change in CPI for Food

Source: BLS CPI data, 1997-2011

19

FOOD INFLATION 2009-2012 2009

Food commodity costs down from summer 2008 highs Energy prices down Recession leads to weakened domestic and global

demand 2010

Sputtering global economy, deflation concerns Renewed commodity price pressures

2011 Higher commodity costs (corn, wheat, soybeans, etc.) Higher energy and transportation costs Increased U.S. exports due to growing global demand,

weak U.S. Dollar Large animal supplies at historic lows due to lingering

effects of 2008 Retailers slow to pass on cost increases for most of year 20

FOOD INFLATION 2009-2012

2012 Most inflationary pressures remain but do not

intensify Retailers begin to pass on costs in earnest US economy improves, dollar strengthens

Domestic demand grows little Exports fall

Late-2011 surge in prices means higher starting point for year

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PERCENT CHANGE IN FOOD CPI (A)

Items 2008 2009 2010 2011 Forecast 2012

All Food 5.5 1.8 0.8 3.7 2.5 to 3.5

FAFH 4.4 3.5 1.3 2.3 2 to 3

FAH 6.4 0.5 0.3 4.8 2.5 to 3.5

Beef 4.5 -1.0 2.9 10.2 4 to 5

Pork 2.3 -2.0 4.7 8.5 3 to 4

Other Meats

3.1 2.3 -0.1 6.4 2.5 to 3.5

Poultry 5.0 1.7 -0.1 2.9 3 to 4 22

PERCENT CHANGE IN FOOD CPI (B)

Items 2008 2009 2010 2011 Forecast 2012

All Food 5.5 1.8 0.8 3.7 2.5 to 3.5

FAH 6.4 0.5 0.3 4.8 2.5 to 3.5

Fish 6.0 3.6 1.1 7.1 4 to 5

Dairy 8.0 -6.4 1.1 6.8 2 to 3

Fats and Oils

13.8 2.3 -0.3 9.3 3.5 to 4.5

Sugar +Sweets

5.5 5.6 2.2 3.3 2 to 3

Eggs 14.0 -14.7 1.5 9.2 1 to 2 23

PERCENT CHANGE IN FOOD CPI (C)

Items 2008 2009 2010 2011 Forecast 2012

All Food 5.5 1.8 0.8 3.7 2.5 to 3.5

FAH 6.4 0.5 0.3 4.8 2.5 to 3.5

Fresh Fruits 4.8 -6.1 -0.6 3.3 3 to 4

Fresh Vegetables

5.6 -3.4 2.0 5.6 1 to 2

Processed F + V

9.5 6.6 -1.3 2.9 3 to 4

Cereals + Bakery

10.2 3.2 -0.8 3.9 3.5 to 4.5

Nonalc. Bev.

4.3 1.9 -0.9 3.2 1.5 to 2.524

CAVEATS Food commodity volatility Food ~ Energy Connection Global demand for U.S. exports Retail margin pressure

Post-recession consumer response Weather is major source of uncertainty Longer term structural inflation

concerns

25

RESOURCES FOR FOOD PRICE TRENDS RESEARCH

ERS CPI Forecastshttp://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm

New ERS Reportshttp://www.ers.usda.gov/publications/err129/http://www.ers.usda.gov/Publications/EIB75/http://www.ers.usda.gov/Publications/ERR105/

BLS CPI, PPI, and Average Price Datahttp://data.bls.gov/PDQ/outside.jsp?survey=cuhttp://data.bls.gov/PDQ/outside.jsp?survey=wphttp://data.bls.gov/PDQ/outside.jsp?survey=ap

AMS Fruit and Vegetable Reporthttp://www.ams.usda.gov/mnreports/fvwretail.pdf

IMF World Commodity Priceshttp://www.imf.org/external/np/res/commod/index.asp

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CONTACT INFORMATION

Richard Volpe, PhDrvolpe@ers.usda.gov

202-694-5395

For more information, see http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/

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