Why Food Prices Are Rising, the Trends and 2018 Forecast

Five Reasons Why Food Prices Will Keep Going Up

Women shopping for groceries
••• Food prices rise for a variety of reasons.  Photo by Granger Wootz/Getty Images

Over the past two decades, food prices have risen 2.6 percent a year on average. But recent factors have slowed food price inflation. The change is only temporary, though. Once those downward pressures abate, food prices will resume their usual regular upward trend.

Forecast

In 2018, the United States Department of Agriculture predicts that food prices will increase between 1.0 to 2.0 percent. Price for beef and veal will rise 2.0 - 3.0 percent.

Egg prices will increase 4.0 to 5.0 percent. Cereal and bakery prices will go up 3.0 to 4.0 percent. The USDA expects prices for fats, fruits, and vegetable to drop. 

Five Causes of Rising Food Prices

There are five causes of inflation in world food prices. They will drive up food prices in the long run. There are also short-term factors that affect supply and demand. Those include the weather, animal diseases, and catastrophes. The following four reasons drive prices higher over time. 

1. High oil prices raise shipping costs. Food gets transported great distances. 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. That contributes 20 percent of the cost of raising grain. Between 2001 and 2007, high oil prices added 40 percent to the cost of growing corn, wheat, and soybeans.

 

2. Climate change creates more drought. Greenhouse gas emissions 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.  

3. The U.S. government subsidizes corn production for biofuels. That takes corn out of the food supply, raising prices. America now uses 40 percent of its corn crop to make ethanol. That's up from 6 percent in 2000. 

4  Third, the World Trade Organization 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

5. People around the world are eating more meat. That's because they are growing 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. 

Recent Trends

2008. Food prices rose a 6.4 percent according to the Consumer Price Index for food. It was the largest single-year increase since 1984. 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 $4.00 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.

2011. In 2011, prices rose 4.8 percent. Some experts said this contributed to the Arab Spring riots. According to the World Bank, wheat prices more than doubled in 2011. 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 were down.

2012. The drought didn't affect overall food prices, which only increased 2.5 percent. Exceptions included beef, veal, poultry, and fruit. But prices fell for pork, eggs, and vegetables. The USDA expected prices to rise 2.5-3.5 percent. It based this on $100/barrel oil prices caused by threats of military action against Iran and high demand caused by summer vacation driving. The USDA was also concerned about reduced soybean production in South America. 

2013. Food prices rose only 0.9 percent in 2013. Beef and veal prices rose 2.0 percent, according to the USDA's "Annual Percent Change in Food Prices by Category." The 2012 drought forced farmers to slaughter cattle that had  become too expensive to feed. The drought also withered crops in the field. As a result, prices for corn, soybeans, and other grains rose. It takes several months for commodities prices to reach the grocery store. As a result, most of the drought's effect occurred in 2013. Hardest hit were fresh vegetables, which rose 4.7 percent. 

2014. Food prices rose 2.4 percent in 2014. That's much lower than the 6-7 percent forecast. Prices of specific types of food rose thanks to weather conditions. For example, drought in the Midwest drove up beef prices 12.1 percent. The prediction had been 28 percent. That's because the beef industry had been suffering from drought since 2012. Here's how beef prices affect the demand schedule.

The California drought, one of the worst on record, resulted in higher prices for fresh fruits, vegetables, and nuts. Fruit prices were forecast to rise 4.5-5.5 percent. They rose 4.8 percent.

2015. Prices increased 1.9 percent on average. Beef and veal prices rose 7.2 percent due to a drought in Texas and Oklahoma. Egg prices skyrocketed 17.8 percent thanks to the Highly Pathogenic Avian Influenza. Fish and seafood cost 0.9 percent less. 

2016. Food prices were expected to rise 1-2 percent. Instead, they fell 1.3 percent. The dollar strengthened 25 percent, lowering food import costs. Egg prices fell 21.1 percent from their excessive 2015 level. 

2017. Food prices rose 8.2 percent, the highest annual average since 2014. The USDA expected prices to rise 1 percent. It thought the strong dollar would continue depressing food import prices. Instead, the dollar weakened, having the opposite effect. Producers were able to export more food, limiting supply and raising domestic prices. Oil prices were also expected to remain moderate. They rose instead, increasing trucking costs. The USDA thought heavy rains would continue to relieve California's drought.

Effect of Food Price Inflation

Food riots occurred in 2008 and 2011 following price spikes. Many say food riots caused the radical changes brought about by the Arab Spring.

As prices continue to rise, food riots could become a more significant problem. World leaders, such as the G-20 or G-7, should address the four underlying reasons. Otherwise, food price inflation will continue to create more global unrest.