Food prices on the way down
Almost exactly 44 years ago, I made a decision that would change my life forever. On the last day of registration to begin my Freshman year at Auburn, I decided that I didn’t want to be an architect after all. With less than an hour left to change my mind, I walked across the campus to Comer Hall and became the first Freshman in years to enroll in Agricultural Economics.
Though I still like to tinker with plans and build things, I never have regretted my decision. Ag Econ was a great degree that prepared me to come back into our family’s peanut shelling business. It also prepared me well for my second career in building and operating restaurants.
I was always fascinated with supply and demand. Of course, life was much simpler then. If there was a big crop the prices went down. If rain or dry weather caused the yields to go down, then the price went up. I was focused on the supply side, interested in the price we could receive for peanuts that would ultimately wind up in consumers hands.
Ironically, for the past 32 years I have been focused on the demand side. With labor and food costs the two largest expenses for our company, holding the line on the price of beef, pork, chicken and grains is important to our bottom line.
Pricing is much more complicated now than it was when I working at Beall Peanut Company. We have truly become a global economy. Politics can have as much impact on prices as the weather. A drought in Australia can affect the price of a hamburger in Donalsonville. A strong dollar influences what other countries will be able to purchase from the United States.
We are currently in the midst of a very unusual cycle. Sustained food deflation is pretty rare over time. America keeps producing more, but the demand overseas has been dropping, often because of the stronger dollar. The price of food at the grocery store has declined for eight months in a row. Some analysts are predicting the longest streak of falling food prices in 50 years.
The consolidation of grocery store chains has made it easier for price wars to erupt. With Wal-Mart and Kroger both controlling thousands of stores, they can easily trigger these price wars by lowering prices to retain market share.
There is a parallel pricing curve that tracks the price of food purchased away from home and compares it to food purchased in grocery stores. Some think of it as wholesale versus retail. I tend to think of it as food you cook at home versus food you eat in a restaurant.
The food deflation in a grocery store, when sustained over time, will almost always cause restaurant prices to drop. If they don’t, people will start eating at home more. Given society’s eating habits today, this trend is slower to develop, but it occurs nevertheless. That is why restaurant traffic nationally is down for the past six months.
Food deflation causes the inflation rate overall to remain low. Combined with a sluggish economy, the interest rates remain low. The price of oil drops and reduces the cost of production and distribution of many food items which in turn causes food prices to decline even further. These factors and many others combine to make predicting the cost of food much more complicated than what they taught me back at Auburn.
Unfortunately, this good news for the consumer is often bad news for the producer. Our local economy is built on agriculture and our area farmers are facing some of their biggest challenges in years. Ironically, for many of our own restaurants, the lower prices which are often in the form of $4 or $5 deals are offset by the fact that the farming community has less money to spend on eating out.
Remember our farmers as they begin this Fall harvest season. More than ever before, we are all in this together.
Dan Ponder can be reached at email@example.com