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Why food costs aren’t done climbing yet – MarketWatch

Why food costs aren’t done climbing yet – MarketWatch

More American consumers ate at home last year because of the pandemic, contributing to the largest yearly rise in food-at-home prices in nine years.

Food costs are expected to increase further in 2021. “This year, food price inflation is certainly a concern,” says Isaac Olvera, lead economist ArrowStream, a supply-chain technology firm for the food services industry.

Food prices in 2020 increased by 3.9% from 2019, according to the U.S. Bureau of Labor Statistics (BLS). Prices for the food-at-home category, where the buyer is the consumer, also climbed at the same 3.9% rate last year, the largest yearly rise since 2011.

The U.S. Department of Agriculture forecasts an increase of 2% to 3% for food prices this year, compared with a 20-year historical average increase of 2.4%. Prices of food-away-from-home—served by restaurants and other services—are also expected to rise by 2% to 3%, while food-at-home prices are forecast to climb by 1% to 2%, the government agency said.

Food inflation is at almost twice the Federal Reserve’s inflation target, says Sal Gilbertie, president and chief investment officer at Teucrium Trading. Meats and grains, and grain products such as bread, show “much higher overall rates of inflation,” he says. BLS data reveal an unadjusted increase of 5.5% in the meats expenditure category from January 2020 to January 2021.

Gilbertie attributes that higher inflation rate to the rise in grain prices and the “failure and subsequent rebuild of China’s hog herd.” The Chinese had to import huge amounts of animal proteins to replace the lack of meat from hog herds hit hard by African swine fever. Then China imported grains to feed the hogs as the nation worked to rebuild their numbers, he says.

Corn
CH21,
-1.32%

C00,
-1.32%

and soybean
SH21,
+0.24%

S00,
+0.24%

prices are higher so far this year. Last year, corn futures climbed by nearly 25%, wheat
WK21,
-1.09%

W00,
-1.09%

was up almost 15% and soybeans rose by more than 37%.

China is behind most of the increase for corn and soybeans, says Olvera. Brazil and the U.S. supply the bulk of the beans to China and last year. Brazil essentially ran out of exportable soybean supplies and was actually importing them.

Among the biggest reasons for the rise in food costs last year, however, was the packing plant disruptions caused by workers suffering from the coronavirus that left many meat processing facilities closed, Olvera says. “Packing plants were shuttered and beef, pork and poultry production were stunted” he says, as consumers flocked to grocery stores to buy up supplies.

Retail food demand this year remains “robust,” says Olvera, with prices across the protein complex above year-ago levels. So far this year, futures prices for lean hogs
LHJ21,
+0.92%

LH00,
+0.92%

have climbed by round 20%, while feeder cattle
FCJ21,
+0.81%

FC00,
+0.78%
,
or cattle sent to the feedlots, have seen a modest fall.

Olvera says the climb in lean hogs this year is due partly to elevated feed costs. “Many traders are placing bets on pork supplies and export expectations,” and the market is suggesting that “domestic pork availability may be tight through midyear.”

Feeder cattle prices have come under pressure on the back of corn price increases. Since corn is used in feed, cattlemen are likely losing money on feedlot cattle, says Olvera. There may be less cattle and tighter supplies of beef in the second half of this year, he says, adding that he continues to view beef demand as strong.

Reopening restaurants will be inflationary, as wholesale food supplies will be reallocated between retail and food service, Olvera says, though it’s unknown how actively consumers will return to restaurants in a post-pandemic world.

In the long run, “we certainly believe that the consumer has changed and this change will force…the food service industry to become more agile,” he says.

Published at Fri, 19 Feb 2021 18:01:00 +0000

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