Retail Food Price Formation in the United States Richard Volpe, Ph.D. Food Markets Branch Food Economics Division ERS-USDA The 5 th Annual Meeting of the OECD FCAN October 30-31, 2013
Disclaimer The views expressed here are those of the author and may not be attributed to USDA or the Economic Research Service.
Retail Food Prices at the USDA Economic Research Service The Food Markets Branch of the Food Economics Division Retail food price formation, transmission, dynamics Industrial organization in food Competition, entry/exit, store formats Food demand, product variety, branding
Retail Food Prices at the USDA Economic Research Service Forecasting retail and wholesale food prices Bureau of Labor Statistics Consumer Price Index, Producer Price Index Food Price Outlook Topic Page updated monthly Annual forecasts for major CPI/PPI categories Discussion of major price trends and changes
What Determines U.S. Food Prices? Modeled by researchers for decades. Most applied research focuses on the ag commodity sector. Gilbert (2010) and Martin (2013) synthesize: Commodity Prices = f(global demand, biofuel production, speculation, past stocks, weather)
What Determines U.S. Food Prices? ERS, studying the retail sector, takes a broader view. Particularly in the U.S., commodity prices are only part of the story By controlling for commodity prices, mechanisms such a biofuels and investor speculation are accounted for and quantified, if not wholly understood Many other industries shape food prices
Where a Consumer Dollar Spent on Food Goes Packaging, 4.0% Advertising, Legal, Finance and Accounting, 3.8% Insurance, 4.4% Retail Trade, 13.6% Energy and Transportation, 10.3% Food Processing, 18.60% Farm and Agribusiness, 11.6% Source: A Revised and Expanded Food Dollar Series (2011), ERR114, Economic Research Service, www.ers.usda.gov/data/fooddollar/ Food Services, 33.7% 7
Back-of-the-envelope: a doubling of ag commodity prices would lead to a net increase of 11-12% in retail food prices Consider the 2012 drought of the American Midwest. Farm corn prices up 70% Soybean prices up 25% Food CPI on track to increase less than average in 2013
Retail Food Prices Relatively Stable Relative to those of many other nations And also relative to prices for other goods and services in the U.S.
Annual Percent Change Food, Energy, Medical Care, Services, 1990-2012 30 25 20 15 10 5 0-5 -10-15 -20 Source: BLS CPI Data, 1970-2012 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 CPI for Home Energy CPI for Motor Fuel CPI for Food CPI for Medical Care CPI for Personal Services 10
60 Annual Percent Change in the Food CPI and Average Field Crop Prices a 50 40 Source: USDA National Agricultural Statistics Service and Bureau of labor Statistics Commodity Prices 30 Food CPI 20 % 10 0-10 -20-30 Field crop prices are represented by the production-weighted average farm price of corn, wheat, and soybeans in the U.S.
But Rising Real Commodity Prices are Having Impacts Food prices have outpaced most others since real commodity prices have increased The share of disposable income spent on food has increased since 2005-2006, a reversal of a longstanding trend
25 Food Price Inflation Outpacing Overall Inflation In the U.S. Percent Change in Major CPI Categories, 2006-2012 20 15 10 5 0 Source: BLS CPI Data, 2006-2012 13
1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 25.0 Share of Disposable Income Spent on Food by U.S. Households 1930-2011 20.0 15.0 10.0 Sources: Calculated by the Economic Research Service from various data sets from the U.S. Census Bureau and the Bureau of Labor Statistics. 5.0
What is the Role of Food Retailers and Market Structure? Economists in the 60s-90s found a positive price-concentration relationship But heterogeneous competition raises questions about this linkage Consider supercenters Found to increase concentration But offer lower prices than supermarkets and may induce competitors to lower their prices
0.9 Consumers Increasingly Shop at Nontraditionals 0.8 0.7 0.6 0.5 0.4 0.3 Grocery Drug Mass Merchandiser Supercenters Club Store Convenience All other 0.2 0.1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Nielsen Homescan Data,
Could Changes in Market Structure Drive Changes in Food Prices? BLS provides CPI data for 27 MSAs (cities) across the U.S. Nielsen TDLinx consists of detailed data on store location, characteristics, annual sales, entry and exit
45 Percentage Change in the Food-at-Home CPI, 2004-2012 40 35 CV = 0.21 30 25 20 15 10 5 0 Source: BLS CPI Data, 2004-2012
80 60 Percentage Change in the FAH CPI and the Food HHI, by MSA, 2004-2012 ρ = 0.36 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27-20 CPI HHI Food -40 Source: BLS CPI Data and Nielsen TDLinx Data -60
Resources for Food Price Trends Research ERS CPI Forecasts http://www.ers.usda.gov/data-products/food-price-outlook.aspx New ERS Reports http://www.ers.usda.gov/publications/err129/ http://www.ers.usda.gov/publications/eib75/ http://www.ers.usda.gov/publications/err105/ BLS CPI, PPI, and Average Price Data http://data.bls.gov/pdq/outside.jsp?survey=cu http://data.bls.gov/pdq/outside.jsp?survey=wp http://data.bls.gov/pdq/outside.jsp?survey=ap AMS Fruit and Vegetable Report http://www.ams.usda.gov/mnreports/fvwretail.pdf IMF World Commodity Prices http://www.imf.org/external/np/res/commod/index.asp
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Contact Information Richard Volpe, PhD rvolpe@ers.usda.gov 202-694-5395 For more information, see http://www.ers.usda.gov/data-products/food-priceoutlook.aspx 23