October 12, 2018
As we approach the Thanksgiving holiday, I am struck by the absence of any widespread news reporting on the U.S. crop harvest. We just take it for granted that the U.S. farmer and livestock operators have hit it out of the park again. A quick look at the “Big Three” (corn, soybeans, and wheat) shows that hard work and good weather has the U.S. sitting on top of the world in terms of food supply.
At the moment, the USDA estimates that the U.S. farmer will grow (in millions of metric tons) 377 of corn, 128 of soybeans, and 51 of wheat. If you put you pen to paper, that will provide 1,692 kilograms of grains and oilseeds per person in the U.S.
Looking at it another way, the average U.S. consumer should eat 10+ pounds of grains and oilseeds per day to exhaust the supply. Oh, and don’t forget the other 100 million metric tons of fruit, vegetables, pulses, tree nuts, and roots/tubers that the average U.S. consumer needs to consume to utilize that supply. In general, the U.S. food plate continues to overflow, and the only source of demand growth comes from the relatively slow population growth. With the superabundance of crop production, the U.S. needs to export the surplus into the world market with its challenges of currency exchange rates and market distortions.
The U.S. farmer and livestock producer make this crop production possible by taking on the weather risks and market risks. So, we should be grateful this Thanksgiving for the results of their talents and hard work. However, it pays to take a moment to remember who else is in the food picture.
Agriculture and food are connected, but they are not the same thing. As I remind farmers and livestock operators, it isn’t food until someone can eat it. The economic transformation of agricultural products into food and services is not limited by the need for calories. The U.S. also has a seemingly limitless demand for variety and convenience. Following World War II, the food and beverage industry added $1.50 to every dollar that the farmer and livestock operator earned for the base commodities. Most Americans ate all of their meals at home with minimal preprocessing of their food stuffs. It was a time of buying flour and baking bread, and no one ever dreamed that they would drink canned or bottled beverages every day.
Fast forward to 2018. Today the food and beverage industry adds $4.50 to every dollar at the farm and ranch level, turning the commodities into food. We live in a world where cheese graters belong in quaint museums, and people only bake bread as a leisure activity.
The real overwhelming trend involves the point of consumption with people spending their money for food and beverages outside of the home. In 2015, Americans spent more money for food and beverages away from home than on food and beverages prepared at home, and I forecast that Americans will never go back to spending more on food prepared at home. The restaurant industry, supermarkets, and convenience stores work hard to make it easier and easier to avoid cooking and cleaning up at home.
The American consumer shows that they want to put their time and effort into many other things, and their marginal spending is skewed towards convenience. The recently revamped USDA food expenditure data and the food dollar shares data creates a very compelling picture. Food service remains the growth engine of the U.S. food industry.
In the early 1990s, foodservices only accounted for 27% of the spending dollar in the U.S. Today, foodservices claims 34% of the spending dollar. It has wrestled away shares from food processing and packaging which have both seen automation and R&D displace labor costs. The other category realizing a noticeable decline is agribusiness, with seed, crop chemicals, fertilizer, and machinery becoming relatively less important to the total spending dollar.
Looking at the spending as a share instead of the absolute dollars helps illustrate the changing structure. Clearly, food processing has lost significant share of the food spending, but the overall revenues have grown thanks to the expanding food spending in total. Total food spending has grown 160% from 1993 to 2018. Even with its reduced share of the U.S. dollar, food processing would have grown from $118 billion to $246 billion.
Farmers and livestock operators had recovered a little bit of ground in terms of their share of the percentage of the food dollar spend, but the latest numbers through 2016 already show the impact of lower crop and livestock prices. The recent high water mark of 2014 ─ 10.4% ─ has already dropped to 7.8% in 2016, which matches the share from the early 2000s. The services component continues to race higher with a stronger economy, and the order “anything, anywhere, at any time” mentality created by the expanding digital economy.
The reality remains that it all works together with the consumer calling the shots based on the menu in front of them. Hopefully, the U.S. consumer will take a moment this Thanksgiving to be thankful for both the incredible productivity of U.S. agriculture and also the ingenuity of the U.S. food producers and service providers.
We provide links to external websites for convenience. Wells Fargo does not endorse and is not responsible for their content, links, privacy, or security policies.