Why Food Prices Are Rising, Recent Trends, and 2019 Forecast
5 Causes of High Food Prices
Since the beginning of the 21st century, food prices have risen 2.6% 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 are expected to resume their usual regular upward trend.
For 2020, the U.S. Department of Agriculture predicts that food prices will increase between 1.5% and 2.5%. Dairy prices are expected to rise 1.5% to 2.5%, vegetable prices 0% to 1%, fresh fruit prices 1% to 2%, cereal and bakery prices 2% to 3%, beef and veal prices 0% to 1%, poultry prices will rise 0.5% to 1.5%, and pork prices 1.5% and 2.5%.
Five Causes of Higher Food Prices
There are five causes that will drive up food prices in the long run. There also are short-term factors that affect supply and demand, including weather, animal diseases, and catastrophes. These five reasons drive prices higher over time:
- 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% of the cost of raising grain. Between 2001 and 2007, high oil prices added 40% to the cost of growing corn, wheat, and soybeans.
- 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.
- U.S. government subsidies for corn production for biofuels take corn out of the food supply, raising prices. The U.S. now uses 40% of its corn crop to make ethanol. That's up from 6% in 2000.
- World Trade Organization limits on 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.
- People around the world are eating more meat 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:
- 2008: Food prices rose 6.4% 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 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: Prices rose by 4.8%. Some experts said this contributed to the Arab Spring uprising. According to the World Bank, wheat prices more than doubled this year. 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.
- 2012: The drought affected overall food prices, which increased by about 2.5%, according to the U.S. Department of Agriculture. Exceptions included beef, veal, poultry, and fruit, but prices fell for pork, eggs, and vegetables. The USDA 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 also was concerned about reduced soybean production in South America.
- 2013: Food prices rose only 0.9% this year. Beef and veal prices rose 2%, 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 effects occurred in 2013. Hardest hit were fresh vegetables, which rose 4.7%.
- 2014: 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 12%. The beef industry had been suffering from drought since 2012. Rising beef prices affected the demand schedule. The California drought, one of the worst on record, resulted in higher prices for fresh fruits, vegetables, and nuts. Fruit prices rose by 4.8%.
- 2015: Prices increased by 1.9% on average. Beef and veal prices rose 7.2% due to a drought in Texas and Oklahoma. Egg prices skyrocketed 17.8% thanks to the Highly Pathogenic Avian Influenza. Fish and seafood cost 0.9% less.
- 2016: Food prices were expected to rise by 1% to 2%. Instead, they fell by 1.3%. The dollar strengthened 25%, lowering food import costs. Egg prices fell 21.1% from their excessive 2015 level.
- 2017: Food prices rose 8.2%, the highest annual average since 2014. The USDA expected prices to rise by 1%. 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 also were expected to remain moderate. They rose instead, increasing trucking costs.
- 2018: Food prices rose 1.6%. Hurricanes caused temporary price spikes as the production of pecans, chickens, and hogs was impacted. Long-term demand for meat and dairy products has declined due to shifting consumer tastes.