Pandemic roils food prices, producer decisions
Price swings at the farm level have less impact on food prices as food gets closer to the dinner table, a USDA report says.
Farmers and ranchers sometimes complain that changes in the prices they receive for their products seem to have little connection with the prices charged by grocery stores or restaurants. That may be especially true now, as the coronavirus pandemic affects the food supply chain.
But there's nothing unusual about the apparent disconnect, according to a report from the U.S. Department of Agriculture's Economic Research Service.
"Price changes at the farm level do not always show up on grocery shelves or restaurant menus. Price swings at the farm level have less impact on food prices as food gets closer to the dinner table," the report said. That's at least partly the case because competing supermarket chains try to keep food prices low by using marketing contracts "to smooth price spikes and keep retail food prices more stable."
Even so, "When forecasting retail food prices changes, the retail environment and consumer demand factors are important components that must be considered. Both of these factors are being affected the COVID-19 pandemic and the accompanying shelter-in-place restrictions," the report said. Data presented in the report predated the pandemic and don't specifically measure its shock on food prices and the food supply chain.
In fact, the disparity sometimes works in agricultural producers' favor. The report pointed to 2011, when the production-weighted price of corn, wheat and soybeans rose 41%, and the Producer Price Index rose 12% and retail food prices, as measured by the Consumer Price Index, rose just 4%.
The ERS report didn't cover new ground, but rather restated something that's already known to economists, said Bryon Parman, assistant Extension professor with North Dakota State University.
Nor is it economists' job to talk about what's fair or unfair. "Everyone's definition of what's fair can be very different depending on which side of the situation you're on," he said.
"If you're on the consumer side, low stable prices are what you're after. If you're on the producer side, you're looking for higher prices for the things you raise and then higher margins," he said. "As economists we just hope those things end up balancing out so that our farmers do well and stay in business and continue to provide a stable living for their families. And at the same time consumers have a steady, healthy and safe supply of food."
But those basic considerations are complicated by the pandemic and its affect on the food supply chain, including outbreaks at meat packing plants. Every component in the supply chain needs to be profitable at some point or the chain can break down, he said.
"A lot of the system we've built today is so inter-dependent that each segment needs to stay healthy and profitable in order for the whole thing to work," he said.
Farmers and ranchers, for their part, are struggling to make sound decisions that will help them get through the pandemic. Trouble is, COVID-19 struck so suddenly that nobody has a good handle on what ultimately will happen or how ag producers should be responding now, Parman said.
"We're trying to make these decisions that will affect us six, seven, eight months down the road that you really can't go back and change. But we just don't have enough information to make a decision about next week, let alone next fall," he said.
His best advice for farmers and ranchers concerned about food price changes, the food system and the pandemic:
"We don't know enough right now to advise producers to change the way they do business right now," he said. "To the best of our knowledge, the best thing to do now is continue business as usual."