Photographer: Daniel Acker

Why Falling Food Prices Around the World Aren't Helping U.S. Consumers

Americans love their processed foods, and that's part of the problem

As world food prices reach an almost six-year low, don't expect American consumers to reap the benefits at restaurants or grocery stores anytime soon.

Costs for meat, dairy, cereals, oils and sugar fell a combined 0.9 percent in June from the previous month, reaching the lowest level since September 2009 and down 21 percent from this time last year, according to data released last week by the United Nations Food and Agriculture Organization. Meanwhile, consumer food prices in the U.S. are increasing faster than for other goods and services, with year-over-year advances averaging 2.4 percent since the start of 2015. That compares with either flat or negative readings for prices overall. 

The UN data showed high global production and cheaper crude oil led to declines across the five commodities surveyed, with sugar and dairy prices down over 30 percent year-to-year, and meat, cereals, and oils at least 15 percent cheaper. Meanwhile, of the corresponding categories in the U.S. consumer price index, only dairy is giving shoppers some relief on a year-over-year basis, driven by a 7.4 percent drop in milk amid a global surplus.

Why aren't declines in wheat and pork translating to supermarket discounts and restaurant deals? That's because price changes in raw agricultural commodities have a "limited impact" on the retail cost of finished goods, according to Joseph Glauber, senior research fellow at the Washington-based International Food Policy Research Institute and former chief economist at the U.S. Agriculture Department. For every dollar spent by consumers, only about 15.8 cents covers farm operations, with the remaining 84.2 cents reflecting transportation, processing, trade, packaging and marketing expenses, according to USDA research.

The extent to which price declines for raw commodities pass through to consumers therefore depends on the ratio of farm to other-production costs. An item like sliced bread, for example, undergoes many processes in the U.S. from farm to wholesale to retail, and as a result responds marginally to changes in underlying wheat prices. A less-processed item like beef, while still incorporating just a fraction of changes in cattle prices, will respond a bit more directly, according to a USDA report that compared the response of different types of foods to changes in ingredient and input costs.

So while falling agricultural commodity prices around the world might not be cutting U.S. consumers much of a break, the decline could be good news for shoppers in less developed countries where food goes through fewer processes and is purchased in closer-to-raw forms.

-With assistance from Alan Bjerga

Before it's here, it's on the Bloomberg Terminal. LEARN MORE