Food inflation impacts everyone, but the impacts always vary widely. 2021 food inflation will be above average again, but it will be strongest in the “food away from home” category.
Food inflation matters to everyone, unlike used car inflation, the one-hit wonder of the May 2021 inflation report. According to the Bureau of Labor Statistics (BLS), used car prices jumped 10% year over year in the May 2021 report. However, for anyone who didn’t buy or sell a used car in May, the impact was not seen or felt. And, it’s just as likely that those used car prices will fall when the new car manufacturers start climbing out from under the semiconductor shortage currently holding them back.
The climb in food prices seldom goes backward. There are always variations between different food segments, but the factors increasing food inflation tend to stick. The Consumer Price Index for Food Away from Home posted a 4.0% Y/Y increase, while Food at Home Price Index increased .7% Y/Y, albeit from June 2020 sheltered-in-place index high1. While increasing costs for raw materials and shipping are contributing to prices increases2, labor cost growth is significantly impacting the food manufacturing and food retailing segments. Week after week, Wells Fargo’s conversations with food and agribusiness customers and prospects reflect labor scarcity and increasing wage competition.
Exactly how food inflation affects an individual depends on that person’s eating choices, and their first choice involves where to eat. According to the most recent BLS report, on average American consumers split their food spending 55% at home and 45% away from home as represented in the table below. That weighting reflects the impact of COVID, and people eating at home more often in 2020. However, it appears that consumers are now reverting to their old pre-pandemic habits, with restaurant and bar spending in April 2021 recovering to $65 billion, just slightly below the pre-COVID record of $66 billion in February 2020.
With the reduction in COVID restrictions, it is likely that by June 2021 spending for “food away from home” will set a new record. This strong demand combined with a tight labor market has many restaurants increasing their menu prices to cope, and to stay profitable. Additionally, restaurants and bars will continue their push to replace labor with technology both for customer-facing positions and behind the scenes.
In contrast to “food away from home”, the rate of increase for “food at home” inflation will be slower. This does not mean food items will get less expensive. Rather, it only reflects that the above-average increases of 2020 are sticking around, but fortunately, not accelerating.
This outlook might run counter to the general perception of rapidly rising food prices at the supermarket. However, Wells Fargo talks with many food producers and manufacturers that face competitors and industries with sufficient manufacturing capacity to make increasing prices difficult. To an important degree, supermarket purchase managers have become the gatekeepers of pricing. They demand proof of scarcity before they will accept any price increases. National retailers have purchase managers who have backgrounds in these industries and stay on top of the markets daily. So, this dynamic plays a big part in the food price volatility.
One key segment ―grains and oilseeds ― has the market’s attention. The grains and oilseeds markets have experienced a strong price increase from 2020 to 2021 year to date. This reflects a noticeable tightness in the carryout stocks of corn and soybeans.3 Sub-par growing years in 2019 and 2020 combined with a renewal of Chinese export demand caught the market off guard, leading to a sharp increase in prices. The statewide average for Iowa for corn was $3.28 per bushel in April 2020. The same measure jumped to $5.35 in April of 2021.4
This increase in feed costs, using industry averages, would add about $0.09 per pound to the cost of feeding a chicken. And, at the same time, other feed components such as soybean meal have also jumped.
$0.09 per pound may sound innocuous at first, but the 2020 average wholesale price of broiler meat was $0.67 a pound, and the retail price $2.01 a pound. This implies a 13% increase in the cost at the wholesale level just for the corn feed. In addition, the labor, energy and the feed components of these costs are rising at above-average rates compared to the last decade. These factors are rolling through the pork and beef complexes simultaneously. Given the tight margins in the competitive animal livestock sectors, these major costs will have to be passed along to the final consumer.
As always, at the consumer level, there will be different adjustments based on income levels. For higher income consumers around the world, they will simply accept these higher prices and consume the same amount of meat as before. For lower income consumers, they will reduce meat consumption and substitute other food items. One food’s demand loss is another food’s demand gain. This substitution ability mutes the perceived inflation impact. And, while consumers do not like to substitute, they will. So, this will keep food inflation at home from advancing even faster.
1 U.S. Bureau of Labor Statistics, May 2021
2 Food Industry Executive, May 2021
3 USDA, WASDE June 2021
4 USDA NASS
