Two years ago, The Hand That Feeds U.S. reported on a phenomenon known as “sticky prices,” something that occurs when crop prices go down, but food prices remain high.
Theses two variables are often considered one in the same but are really very independent of one another. The crop or “commodity” price is what farmers get for what they’ve grown. The food price however, is what consumers pay at the grocery store and includes everything from transportation costs, packaging, marketing and a number of other factors that have very little to do with the food itself.
Now, common sense would have us believe that the former would be linked to the latter, but history has taught us that’s not necessarily the case.
When we first wrote about this two years ago, corn, wheat and rice farmers were facing a tough market and getting a lot less for their crops than they had in previous years. But food prices didn’t reflect this. In fact, during this time, the U.S. Department of Agriculture (USDA) was predicting a 2.5 to 3.5 percent increase in food bills. As it turned out, when it comes to food prices, what goes up doesn’t ever come down.
“…[Food] companies slap higher prices on products and keep them there even though the rationale for the price hikes—such as soaring oil prices—is gone,” the Associated Press wrote in October 2008.
In response to these reports of “sticky prices” major food manufacturer Unilever, told the Los Angeles Times in 2009 that the situation was “complex,” with pricing levels remaining “both volatile and unpredictable in the medium to long term.” Kraft CEO Irene Rosenfeld told USA Today, “Our prices will go up and down as the cost of our ingredients goes up and down.”
But that wasn’t the case. Kraft’s prices continued to rise in spite of falling ingredient prices and profit margins increased right along with them.
Two years later, a massive, record-setting drought is smothering the nation’s Corn Belt, resulting in the lowest average corn yield since 1995—in spite of the fact that this year’s was the largest crop planted since 1937—and threatening to send crop prices sky high. Similarly, soybean production is forecast to be down by 12 percent from last year, and if realized, would have the lowest average yield since 2003.
“Drought’s one of those things,” said Kai Ryssdal of Marketplace, during a recent interview with USDA Secretary Tom Vilsack, “that the rest of us farther along the food chain don’t really think about it until it starts showing up in prices at the grocery store. And the United Nations said this morning global food prices were up 6 percent last month.”
“I think it’s important to distinguish between commodity prices and food prices,” Vilsack explained. “The farmer only gets, in the United States…14 cents of every food dollar that’s spent in the grocery store. So when commodity prices go up, they can go up dramatically. In fact, they can double. And the impact on food prices is very, very marginal.”
In fact, the National Farmer’s Union publishes a chart each month, illustrating just how little the farmer’s share has to do with the cost of food prices. For example, the latest chart shows:
A box of cereal:
A two-liter bottle of soda:
A bag of potato chips:
When commodity prices fall again—and they will—we know better than to count on falling food costs. History shows us that food and grocery manufacturers aren’t likely to pass those savings on to consumers…ever. Once those prices rise, they have a tendency to stick.