Drop in food prices cuts both ways
We are so accustomed to inexorably rising food prices that a more salutary development in recent years may have gone unnoticed. Prices at the grocery store have actually been falling. And while producers and farm equipment makers are smarting, families are benefitting from lower food bills.
In the late 18th century, a political economist and biologist named Thomas Malthus postulated that food production could only increase in a linear progression, while population tended to grow geometrically. His theory predicted periods of massive starvation as a natural check on increasing population. The so-called Mathusian Catastrophe guaranteed that no nation could successfully expand its food production sufficiently to meet rising demand.
As often happens, doomsday scenarios like systemic starvation or peak oil fail to predict radical shifts in technology that rise to meet the challenge. In the case of global food production, new developments in farming technology, fertilizers, seeds and soil management have lifted output to record levels. In 2016, especially beneficent weather patterns have lifted crop yields even further, to the degree that some farmers can’t find buyers for their surplus produce. Prices are responding, to the delight of shoppers.
According to Census Bureau data from the BLS, overall prices for food purchased to consume at home fell 2 percent from August 2015 through August 2016. Beef prices declined 7 percent, milk fell 5 percent, and eggs dropped a whopping 38 percent from the prior year.
Grain producers are anticipating record hauls this year as well. Wheat prices on the futures exchange have declined by over 20 percent this year; corn prices are down well over 50 percent from their 2012 highs. And wholesale milk prices paid to dairy farmers have fallen by 40 percent over the past two years thanks to improved productivity, declining exports and weaker demand both inside and outside the United States.
The relief at the supermarket comes as welcome news to families still struggling from stagnant wages and tepid economic growth. Grocery shoppers are paying the lowest prices on average since 2009, and the outlook for 2017 prices remains favorable as well. Certainly welcome news.
But just as with cheap oil, cheaper food translates into reduced sales and smaller profits on the production side of the equation. Some dairy farmers have been reduced to dumping raw milk onto fields or into manure pits for lack of buyers. Government warehouses are stacked to the rafters with cheese and powdered milk purchased through farm price support programs. Despite some relief in production costs like fuel and feed, US farm income is projected to fall by 12 percent in 2016 according to the USDA to the lowest level in eight years.
As farmers cut back to make ends meet, equipment producers are feeling the pressure as well. Ag equipment stalwart John Deere expects US sales to decline by 20 percent in 2016 and has announced another round of layoffs. And industry experts are anticipating a 12 percent drop in exports of U.S.-made farm equipment in response to softer demand worldwide. No doubt the venerable Professor Malthus would be astounded.
Even supermarket chains are feeling the pressure from falling prices. Kroger recently reported a double-digit drop in earnings and suffered a commensurate stock price tumble, and discount outlets like Aldi and are now resorting in some cases to price wars to retain market share.
This is great news for consumers, who have learned to expect ever-higher costs at the grocery store. And despite the anachronistic system of government price supports, market forces are working efficiently to propel innovation and balance supply and demand.