The pandemic affected food prices in four ways.
More than almost any other area of consumer spending, grocery prices were impacted by the coronavirus (COVID-19) pandemic.
The largest monthly increase since February 1974 occurred in April when the consumer price index (CPI) for food consumed at home increased by 2.7%. Between June 2019 and June 2020, grocery prices increased by 5.6%, which is more than twice the average rate of inflation in food prices that Americans have become accustomed to seeing in recent years. Prices for some specific foods have increased more dramatically than others; for example, the cost of eggs has increased by 12%, potatoes by 13%, tomatoes by 8%, and beef and veal by 25% over the past year.
Many people are constantly concerned about food prices, according to Andy Herron, vice president of FMI’s tax, trade, sustainability, and policy development division. Everybody knows that elderly relative who used to sell ground beef for five cents a pound. The experience we currently have is a little bit unique.
A digital platform investigating the price increases was introduced by the FMI. The website looks at supply chain effects of the COVID-19 shock as well as factors influencing food prices.
“A complex algorithm that can be challenging to understand determines food prices,” stated Leslie G. Sarasin, the FMI’s president and chief executive officer. Every now and then, these factors become so warped that their effect on the typical shopper’s grocery receipt becomes obvious.”
The digital tool was inspired by a report written by Ricky Volpe, PhD, an associate professor at Cal Poly in San Luis Obispo, California. The report found that the pandemic quickly affected food prices by causing four major changes.
Closed-off channels of advertising
The first two were the sharp decline in demand for foodservice and the quick shift toward eating at home. Over half of the money spent on food by households in February was spent outside of supermarkets. It was less than a third by April, which means that in just two months, almost $23 billion in spending that was previously spent away from home was switched to the grocery industry.
“This wouldn’t have been nearly as big of a deal if it had happened 30 years ago, but Americans had tipped the scales toward eating more out of the house than at home just before the pandemic,” Mr. Volpe stated.
The result was a forked supply chain, with agricultural commodities and finished products funneled directly into either food at home or food away from. Those two marketing channels were relatively walled off from one another, Mr. Volpe said.
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Managing the lack of labour for mushroom picking
“Huge quantities of commodities and finished products suddenly had nowhere to go,” he said. “Fields of produce were left rotting or tilled back into the earth and dairy farmers were dumping milk.”
The impacts have been greater for ranchers, who sold or reduced the size of herds in response to decreased demand, and for other highly perishable animal products, like eggs, which incur high packaging and transportation costs.
“Grower-shippers and distributors covering those costs reverberated throughout the supply chain and was a major factor that led to higher food costs,” Mr. Volpe said.
Manufacturing and selling
Increased labor challenges, new operating procedures, improved safety protocols, and more oversight all led to higher costs in the manufacturing, processing, and distribution industries. Some businesses moved their product lines from foodservice to retail, a move that comes with high costs and legal challenges.
The $23 billion shift in spending toward retailers mostly covered up increases in store costs.
Mr. Volpe stated, “There’s a misconception that grocery stores have to be making a ton of money.” “There is no doubt that the percentage increase in costs surpasses the percentage increase in food prices.”
Margins already were delicate in the food retail sector and were squeezed even more as retailers pivoted operations for the new environment. This includes increased labor and labor turnover, more overhead, personal protective equipment, labels, cleaning products and transparent barriers. Transportation and acquisition costs for rushed orders are higher than typical orders. Retailers also reduced availability of higher margin items like hot bars and cold bars.
Together, increased operating costs across the supply chain were larger than the increase in the food at home CPI.
“Grocery shoppers can rest assured that cost increases are not related to increased profits, and instead result from a spike in expenses,” Ms. Sarasin said.