What’s Keeping Food Costs So High?

By Garland West May 3, 2023 | 9 MIN READ

The Dirt

The cost of the food we put on our tables is still going up and up. What keeps driving up food costs...and is there anything we can do about it? Or is paying more for our food the price we pay for a better, healthier food system? Let's take a closer look.

Global Food

What’s Keeping Food Costs So High?

The cost of the food we put on our tables is still going up and up. What keeps driving up food costs...and is there anything we can do about it? Or is paying more for our food the price we pay for a better, healthier food system? Let's take a closer look.

By Garland West May 3, 2023 | 9 MIN READ

The Dirt

The cost of the food we put on our tables is still going up and up. What keeps driving up food costs...and is there anything we can do about it? Or is paying more for our food the price we pay for a better, healthier food system? Let's take a closer look.

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Well, they are at it again.

The Bureau of Labor Statistics (BLS), the U.S. Department of Agriculture (USDA), and a host of other noted authorities have told us what we already knew: food costs continue to climb. Maybe not as fast as they were. But annual increases of around 10 percent still cause all of us a lot of angst. Is this the new norm?

Just how bad is it?

The BLS numbers regarding retail food price inflation really shouldn’t surprise anyone who buys food today. Food in March 2023 was 8.4 percent more expensive than food in March 2022, down from the 9.5 percent month-to-month increase seen in February.

Prices at the grocery store actually showed a slightly sharper decline, falling to “only” 8.4 percent after a February increase of 10.2 percent. It still sounds awful, unless you consider that annual food inflation peaked last summer at 11.4 percent.

The masochists among us can use the chart below to track where the cost increases hit us hardest. We’re all probably well aware of the headlines – eggs, cereals, beverages, all up sharply. 

food cost, What’s Keeping Food Costs So High?

Reading between the lines

The problem with statistics is – well, they are statistics. Cold, impersonal numbers and charts often don’t tell the story in a way we all can easily grasp and appreciate. But we all have a stake in these numbers. After all, U.S. consumers, government and businesses spent $2.12 trillion on food and beverages in 2021, at home and away from home.

That’s 2,120,000,000,000 dollar bills, or about 5.4 percent of our entire Gross National Product spent on food, representing an estimated 10-12 percent of the average American family’s disposable income.

The numbers tell us the cost of our food is hugely important, to all of us. 

We at Dirt to Dinner work hard to find the important news buried in all that data. But when we saw the latest round of numbers about food costs, we elected to look behind the numbers by revisiting some of the past reports we’ve done on the complicated food-price picture.

Back in June 2021, we picked up on some great reporting by the Toledo Blade that tracked the actual cost of a shopping cart containing 15 commonly purchased food products. The Blade captured the cost of the same items in 2003, 2008, and 2011.

We replicated the basket and added our own 2021 findings. We found a 10-year increase in the cost of the basket of 28.2 percent. We’re not gifted statisticians, admittedly. But the cost increase seemed pretty much in line with historic food price.

So what would it look like in 2023?  We conducted a quick survey to see how the cart costs lined up with the latest inflation figures. That same cart of groceries that cost us $44.96 in 2021 today clocked in at a hefty $55.61, or 23.6 percent more than just two years ago.

food cost, What’s Keeping Food Costs So High?

Big increases in prices of cereal products, sugary beverages, eggs, and coffee accounted for the largest share of the rise. Our quick look behind the numbers suggests that the dramatic events of the past three years managed to inflate our food costs almost as much as we saw in the entire 2011-20 decade.

By taking advantage of sales and promotions, however, we cut the cost of the 15 items by over $4, bringing the annual cost rise to an average of 7.3 percent. Our 2023 sample was significantly smaller than in 2021, so our findings can hardly be categorized as a rigorous statistical analysis. But as a snapshot of the price realities facing consumers, it seemed to align with the statistics provided by BLS and USDA’s Economic Research Service (ERS).

Are commodity costs behind the continuing increase?

The big question that emerged for us at Dirt to Dinner had less to do with the hard numbers than the causes behind them. What’s keeping the inflation engine churning when it comes to our food?

One of the more frequent questions posed by consumers involves the cost of the commodities that fuel our modern food system. Prices for basic crops, notably food grains and feed grains, soybeans, and many other cornerstone commodities, remain high, by historical standards. But they have declined from the exceptionally high levels seen during the pandemic and the initial portion of the Ukrainian conflict.

All that aside, commodity costs are far from the only cost element in our food.

What else drives food cost inflation?

The world continues to increase production of essential commodities such as corn, soy, wheat, and palm. But as various USDA commodity reports and market analysts note, those increases are matched by equally significant increases in demand, with constant pressure on the level of available stocks to contend with disruptions to normal cropping patterns or trade needs. We are simply not likely to see production outpace consumption at the levels needed to bring commodity prices back to historically low levels.

food cost, What’s Keeping Food Costs So High?

For every dollar spent on food, where does it go?

According to an ERS analysis by the National Farmers Union (NFU), farmers receive only about 20 cents of the $4.49 cost of a two-pound loaf of bread. Overall, across all major food categories, the farmer’s share of each food dollar is estimated at 14.3 cents. That’s actually a lower share of the food dollar than the 15.5 cents received in 2020 – prior to the pandemic and Ukraine conflict.

The food dollar also includes costs for all steps along the marketing chain – obvious things such as basic and secondary processing, food manufacturing, packaging, transportation, storage, and distribution. But it also includes the cost of finance, advertising, insurance, and all the other “hidden” costs that go into moving food from dirt to dinner.

Every step in the chain is subject to the same economic pressures. Energy prices also remain relatively high. Freight rates, insurance costs, and added finance costs — all contribute to sustained upward pressure on food costs.

One commonly overlooked component of the food-dollar breakdown involves labor costs. ERS estimates that half of our food dollar goes to salaries, wages, or benefits of those across the food chain.  (In comparison, ERS estimates that energy costs represent only 3.2 cents of the same food dollar.)

BLS notes that overall U.S. wages and salaries increased by 4.5 percent in 2021 and another 5.1 percent in 2022 – almost double the annual increase seen in 2020. Increases in the labor-intensive food processing sector since 2020 have often eclipsed these levels.  As far back as November 2021, Jayson Luck of Purdue University reported substantial pay hikes already underway:

“The average weekly earnings of production and non-supervisory employees working in food manufacturing have increased 11.1% from before the pandemic in January 2020 to September 2021.

Specifically in animal slaughtering and processing, weekly earnings have increased 19.1% over this same time period. Wages for non-supervisory workers in food retail (i.e., grocery) have increased 8.5% and for workers in food service (i.e., restaurants) by 15.5% since the start of the pandemic.” 

– Jayson Luck, EconoFact, Nov. 12, 2021

More recently, the United Food and Commercial Workers Union reported new spring 2023 contracts with more generous compensation elements, including a contract for a Heinz facility offering a 23 increase in wages and compensation spread over three years, and another Delaware vegetable processing plant offering a new three-year contract with annual 5 percent wage increases, some retroactive.

Add a pinch of uncertainty, too…

By any measure, rising labor costs continue to be a significant factor in food price inflation.

Add to all that some additional complications – most oriented around the simple power of uncertainty. How long will the conflict in Ukraine go on? What new conflicts may emerge that will affect food production and trade? Will the global economy enter a recession?

Which way will energy costs go? How will climate change affect global production of essential food commodities? Are production climate patterns and global trade flows undergoing a fundamental shift? Will requests for ESG practices increase costs to the consumer? How quickly can we use science intelligently to increase global productivity and still sustain, enhance, and protect our planet’s air, soil and water?

In our modern interdependent world, uncertainty translates into risk – especially economic risk. Uncertainty creates a constant upward pressure on prices, regardless of the goods or commodities involved

The Big Question: Cost or Investment?

The uncertainties hanging over the global food system seem daunting. And they are. But they aren’t insurmountable, and history suggests our food system has always remained flexible and agile. It continues to remain healthy overall and fully capable of meeting our rising food needs. But the price we pay for that food security may be changing. Higher food costs may be the fuel needed to keep the productive engine running.

Those in the food supply chain, from dirt to dinner, have been challenged over food costs – and rising profit reports – make several points about the future and the past. Reckless claims of “greed’ and “profiteering” ignore the fact that past food prices have been an exceptionally good bargain for consumers, they contend.

food cost, What’s Keeping Food Costs So High?

Also, increases in wages and salaries have helped offset – and in many years exceeded – the rate of food inflation. The latest data from BLS suggests a growing convergence of the rate of increase in food costs and average wages.

Furthermore, the sector continues to promote sales and promotions that eat into margins, while significant investments in new and better equipment and systems are needed every day.

Double-digit annual price increases are painful, especially following two decades of retail food price inflation that averaged just 2 percent per year. But smart shopping is still an important way to ease the pain.

food cost, What’s Keeping Food Costs So High?

Economists in the public and private sectors say the inflation rates should continue to drop. But a return to the 2 percent level of increase may not, and certainly not in the short term. As ERS put it in their Food Price Outlook for 2023:

Food prices are expected to grow more slowly in 2023 than in 2022 but still at above-historical average rates. 

In 2023, all food prices are predicted to increase by 7.5 percent, with a prediction interval of 5.5 to 9.6 percent. Food-at-home prices are predicted to increase by 7.8 percent, with a prediction interval of 5.3 to 10.5 percent. Food-away-from-home prices are predicted to increase by 8.3 percent, with a prediction interval of 7.2 to 9.3 percent.

Business leaders and many economists argue that higher earnings mean we can continue to develop our food system to meet the changing expectations of consumers, for more variety, convenience, healthy options, environmental protections, fair and responsible sourcing, and all the other demands of our progressive world.

Furthermore, they point out, consumers by and large have been willing to pay the costs of building and maintaining a food system to meet those expectations.

Government and numerous other private sector reports tend to support this line of argument. Consumers combat higher food costs in a variety of ways – by being more selective in the foods they put on the table, by looking more aggressively for store promotions and sales, by cutting back on spending on out-of-home dining, and by a host of other intelligent responses to higher costs.

Despite the continuing upward trend in prices, there’s no apparent imminent rebellion in the streets. Perhaps unconsciously, we as consumers may be coming to realize that higher food prices are as much an investment in our long-term food security as a day-to-day expense.

The Bottom Line

Food price inflation should ease from the painful levels generated by armed conflict, climate change, tightening supply and demand figures, a global pandemic, and a whole host of other uncertainties facing all parts of our food chain.  But higher food costs may be the price we pay for maintaining a food system capable of overcoming all these uncertainties – and more if need be.