Why Food Prices Are Rising, Recent Trends, and 2021 Forecast
5 Causes of High Food Prices
Since the beginning of the 21st century, food prices have risen between 2.0% and 3.0% a year on average. Grocery store prices have risen 2.0% while restaurant food has increased 2.8%.
Five Causes of Higher Food Prices
In the short-term, many factors affect food prices, making them volatile. These factors include supply and demand, weather, disease outbreaks, war, and natural disasters.
In the long run, there are five underlying forces that tend to drive up food prices:
High Oil Prices
Food gets transported great distances, and high oil prices raise shipping costs. You can expect high gas prices about six weeks after an increase in oil futures. Oil prices also affect farming. Oil byproducts are a significant component of fertilizer.
Climate change creates more extreme weather. Its cause is greenhouse gas emissions that trap heat, causing air temperatures to increase. Hot air absorbs more moisture. It rains less, water from lakes and rivers evaporate, and the land dries up. When it does rain, the water runs off the land instead of getting absorbed into the water table. That creates floods, which in turn can damage crops.
U.S. government subsidies for corn production for biofuels take corn out of the food supply, raising prices. The U.S. now uses 37% of its corn crop to make ethanol. That's up from 6% in 2000.
World Trade Organization Limits on Stockpiles
The World Trade Organization (WTO) limits the amount of subsidized corn and wheat that countries can add to global stockpiles. The United States, the European Union, and some developing countries heavily subsidize their agricultural industries. Farmers in those countries receive an unfair trade advantage. The WTO limits stockpiling to lower this edge. But it also reduces the amount of food available in a shortage. That increases food price volatility.
More Meat Eating
People around the world are eating more meat, especially pork, as they become more affluent. It takes more grain to feed the animals needed for meat-based meals than is necessary for grain-based meals. Higher demand for meat means higher grain prices. Over time, this could offset lower U.S. demand for meat and dairy.
Most years see major events that impact food prices. Some recent years that saw such impact include:
2020: The COVID-19 Pandemic
In 2020, the COVID-19 pandemic sent food prices up by 3.3%. Most of this was driven by a 4.4% increase in meat, fish, poultry, and eggs. Dairy products, up 3.8%, were also a substantial contributor to the rise.
The federal government declared a national emergency in March. Many people stocked up on groceries and began cooking at home instead of eating at restaurants. This escalated demand for food-at-home. Exports and imports were disrupted as countries closed their borders to stop the spread of the virus. Food supply chains were constrained, leading to lower supply.
Meat, fish, dairy, and eggs were especially affected by the shifting economy brought on by the pandemic.
2018 and 2019: Climate Disasters
Food prices rose 1.6% in 2018. Hurricanes caused temporary price spikes in the production of pecans and chickens.
In 2019, food prices rose by 1.8%. The U.S. experienced 14 separate billion-dollar disasters including three major floods, eight severe storms, two hurricanes (Dorian and Imelda), and one wildfire event.
2016 and 2017: Dollar Impact on Food Costs
In 2016, food prices were expected to rise by 1% to 2%. Instead, they rose by 0.3%. Egg prices fell 21.1% from their excessive 2015 level, contributing to a lower-than-expected rise in food prices.
Food prices rose 0.9% in 2017, nearly hitting the USDA expectation that food prices would rise 1%. Producers were able to export more food, limiting supply and increasing domestic prices.
Oil prices also were expected to remain moderate in 2017. They rose instead, increasing trucking costs.
2015: Impact of Avian Influenza
Prices increased by 1.9% on average. Beef and veal prices rose 7.2%. Egg prices skyrocketed by 17.8% because of avian influenza, but fish and seafood prices dropped 0.9%.
2011-2014: How Calamities Affected World Food Supply
Food prices rose 2.4%. Prices of specific types of food rose thanks to weather conditions. For example, drought in the Midwest drove up beef prices by 12.1%. The California drought, one of the worst on record, resulted in higher prices for fresh fruits, vegetables, and nuts. Fresh-fruit prices rose by 4.8%.
Food prices rose 1.4%. Beef and veal prices rose 2%. The 2012 drought forced farmers to slaughter cattle that had become too expensive to feed. It takes several months for commodities prices to reach the grocery store. As a result, most of the drought's effects occurred in 2013. The hardest hit were fresh vegetables and poultry, which rose 4.7%.
Severe droughts increased food prices, which rose by 2.6%. Prices for beef, veal, and poultry rose significantly, but prices fell for fruits and vegetables. One reason was higher transportation costs as oil prices hit their second-highest price since 1987. That was caused by threats of military action when Iran threatened to close the Strait of Hormuz.
Prices rose by 3.7%. Massive wildfires in Russia devastated crops in 2010. In response, commodity speculators drove prices even higher to take advantage of this trend. They drove corn, sugar, and cooking oil prices higher. Droughts in the southern United States reduced hen output, raising egg prices. Japan's earthquake reduced fishing capability, lowering seafood prices.
2008: The Great Recession
Food prices rose 5.5% according to the Consumer Price Index for food. It was the largest single-year increase since 1990.
Commodity speculators caused higher food prices in 2008 and 2009. As the global financial crisis pummeled stock market prices, investors fled to the commodities markets. As a result, oil prices rose to a record of $145 a barrel in July, driving gas prices to $4 a gallon. Part of this was caused by surging demand from China and India, which escaped the brunt of the subprime mortgage crisis. This asset bubble spread to wheat, gold, and other related futures markets. Food prices skyrocketed worldwide. As a result, food riots by people facing starvation erupted in less-developed countries.
Looking Ahead: The Ongoing Impact of the Pandemic
For 2021, the U.S. Department of Agriculture (USDA) predicts that food-at-home (grocery store) prices will increase 1%-2%. It expects that prices will return to normal after being inflated due to supply shortages during the pandemic. In 2020, at-home food prices increased 3.5%.
The USDA predicts food-away-from-home (restaurant) prices will increase 2%-3%. Demand will rise after many restaurants were shut down during the pandemic.
Dairy, poultry, fresh fruit, and vegetable prices are expected to rise up to 1%, while cereal and bakery prices will increase 1.5%-2.5%. Beef and veal prices are expected to drop 1.5%-2.5%. Pork and egg prices could range between a 0.5% drop and a 0.5% increase. Fish and seafood prices are expected to rise 1.5%-2.5%.
- There are five underlying forces that will continue to drive prices higher in the long run.
- Food prices spiked during the pandemic.
- The biggest spike in the past 30 years of food prices came in 2008.
- Prices are expected to return to normal in 2021.