The rapid increase in food prices will be one of the biggest challenges of 2022. In 2021, US grocery prices rose 7%, while world food prices jumped 28%. Absent substantial government intervention, global food prices are on pace to reach all-time highs during the spring harvest. Cost increases are being driven by Covid, labor shortages, supply chain issues, the climate crisis, an energy crisis, and decades of industry consolidation – meaning there is no quick and easy fix.
The rapid spread of the Omicron variant has taxed already strained supply chains as employees fall sick and may have to quarantine for weeks at a time. While the omicron wave is waning, the result has been barren shelves across the country. At the same time, companies spend heavily on overtime for the remaining staff and utilize third-party logistic companies at a spot rate to ensure deliveries. Those increased costs are ultimately shared with consumers.
In the world of durable goods, supply chain delays mean someone has to wait longer to receive an item. In the world of perishables, supply chain delays create waste and food that never makes it to market. Conagra, one of the US’s most prominent food providers, saw their net income fall 27% in the last quarter due to a combination of these issues. They are now predicting food inflation of 14% for the year due to supply chain issues and increased input costs.
There is a labor shortage in the US. Even if the physically impossible occurred and every unemployed person in the U.S. became employed, there would still be 4.4M excess jobs that would go unfilled. Such an environment places varying pressure on businesses, with increased impact on companies with low margins in industries where passing along costs to consumers is difficult, and less impact on high margin, highly productive companies where passing along costs to the consumer is easier. i.e., greater impact on food production and less on Amazon and technology companies.
The reshuffling of the labor market means there are not enough fruit pickers, slaughterhouse workers, warehouse employees, truckers, waiters, and chefs. There simply aren’t enough people in the food supply chain to efficiently get food from the farm to the table. Even as more and more people rejoin the workforce, the demand for additional labor is outpacing supply, and the workforce shortage continues to worsen.
Immigrants are the main source of additional labor in food production but their participation is being hampered by administrative issues. The Accommodation and Food Services, and Transportation and Warehousing sectors rely on 21% immigrant labor. Yet, a major backlog of 1.48 million pending work permit applications is keeping workers on the sidelines, exactly how many people have lost their jobs due to permit expirations is unknown.
Over the past year, weather events the world over have dramatically affected food prices. Agriculture is dependent on stable and predictable weather conditions, leaving it the most vulnerable industry to the climate crisis. While it isn’t possible to predict what natural disasters will happen in 2022, we can anticipate that some level of disruption will occur.
In the US, winter storm Uri heavily damaged tree crops like citrus in the Rio Grande valley, causing citrus production to drop 39% this season alone. Unlike annual crops that can readily adapt to changing market conditions, tree crops take 3-5 years to bear fruit. To make matters worse, Florida produced its smallest orange crop in 77 years due to an outbreak of citrus greening, a bacterial disease that slowly kills the tree.
At the same time, droughts in the midwest during 2021 caused downward pressure on cattle herds, causing cattle inventory to drop to its lowest level since 2016. Over the past year, the price of beef has increased 20% and is expected to continue to climb.
Shipping and Handling
Since the start of the pandemic, the cost to ship a 40-foot container has risen from $1,400 to about $9,150 currently, an over 500% increase. Affecting all food imports, most notably coffee.
Domestically, the cost of shipping inside the US has increased 18.2% which is an all-time high.
What Goes In Must Come Out
40% of farmers are having difficulty obtaining inputs from chemicals to parts for processing their harvest. Over the past year, all chemical inputs have risen 2-5x, including pesticides, herbicides, insecticides, and fungicides. All nitrogen fertilizers have doubled to tripled in cost, with anhydrous now reaching all-time highs.
US farmers are utilizing several strategies to compensate for nutrient shortages. Their efforts include planting cover crops that decrease the need for fertilizer, increasing soil testing to only apply fertilizer where necessary, and switching from high nitrogen dependent crops like corn, oats, and barley to low nitrogen crops like soybeans. The result could be an oversupply of soybeans and too little corn. And, for better or worse, the American diet is heavily dependent on processed foods containing high fructose corn syrup, while 40% of the US corn crop goes into livestock feed, further affecting meat prices.
Significant disruptions in what foods people consumed during the pandemic led to heavy losses for romaine lettuce growers. They responded by cutting back on romaine plantings and, as demand normalized, prices have now shot up 61%. This is an example of how disruptions in supply and demand can cause significant changes in food prices.
Industry Consolidation, Nash Equilibriums, and Trust-Busting
Since the 1980s, many industries have seen incredible amounts of consolidation. Companies would roll up competitors, reduce overhead costs while slashing excess capacity, and share the cost savings with consumers. As far as the government has been concerned, no actual harm has been done as long as the consumer benefits from these consolidations.
The result in the meatpacking industry is that four companies, Tyson Foods, Cargill, National Beef Packing Company, and JBS, have increased their market share from 36% to 85%. Those four companies now have near-perfect price control from cattle ranchers and consumers alike.
As beef production costs rise due to labor shortages and fertilizer prices, you’d expect a shared burden between meatpackers and consumers. But, since the start of the pandemic, the consumer benefit from this relationship has now broken down. Meatpackers are not only passing along the cost due to the increased cost of inputs but also increasing prices due to the scarcity that their own hyper-efficient supply chain has generated. In the face of disruption, many companies are experiencing margin expansion and record profits – not margin compression.
In a healthy competitive market, a company would be incentivized to cut prices to obtain more market share, which in turn would keep prices in check across the entire market. Yet, once an industry has become excessively consolidated, it’s possible that every company inside that market unilaterally decides to raise prices. As long as no other company decides to break the system, all the companies involved would benefit even more at the consumer’s expense.
The phenomenon is called a Nash equilibrium, and they are forming across many industries. And, unlike price-fixing or collusion which are blatantly illegal, a Nash equilibrium requires no direct communication between participants and isn’t breaking the law. Executives with the same incentive structures are drawing the same conclusion independently. Investors have made it clear that companies that expand margins during the crisis will be rewarded and those that don’t will be dropped.
If the government were to pursue antitrust action, it could take the better part of a decade to resolve. In the interim, the Biden administration is attempting a market-based solution by injecting $1B into small independent meat processing companies to enhance competition. Independent meat processors offer better prices to ranchers which incentivizes an increased beef supply, while also offering more competitive prices to consumers. But, it will take time for those independent processors to ramp up capacity enough to significantly impact the overall industry.
Economists often note that the cure to high prices is high prices, except in industries with inelastic demand and few alternatives. Many of us are still waiting on the high cost of healthcare to be cured by high prices.
Even if the US spring crop goes off without a hitch, the rest of the world almost certainly won’t be so lucky.
As food prices rise internationally, countries like China are stockpiling food in fear of additional shortages. By the middle of 2022, the US Department of Agriculture predicts China will have the largest stockpile of food commodities, with 69% of the world’s corn reserves, 60% of its rice, and 51% of its wheat – causing additional price pressure.
At the same time, the European energy crisis and tension in Eastern Europe have caused even more significant fertilizer shortages. Russia, the world’s largest fertilizer exporter and second-largest exporter of potash, and China have placed export controls or bans on the essential nutrients. Emerging markets are the most affected. Not using fertilizer will diminish crop yields by 30-40%. Food is an international commodity: a lack anywhere globally will increase demand and, in turn, prices for US food products. Leaving the US government in an unenviable situation of deciding between export controls and humanitarian food crisis overseas.
A Call to Action
Most people reading this article have the resources to navigate this pressure and will be more than okay, but that won’t be the case for many Americans. 38 million Americans are food insecure, and that number will only increase as food costs rise. It will be a very difficult year for food banks around the country, on the heels of a pandemic that has decimated contributions to nonprofits in its wake. I ask you to consider joining our campaign with a donation to the Central Texas Food Bank below or to a local food bank wherever you live.