“Navigating Food Inflation: Insights on Rising Prices and Market Dynamics from Wells Fargo’s Chief Agricultural Economist”
Every food category, whether it’s meat, produce, bread, or dairy, has been affected by inflationary pressures. Recently, the consumer price index for food purchased at home recorded its largest 12-month increase in over 40 years, as reported by the U.S. Bureau of Labor Statistics. Factors contributing to this rise include supply chain disruptions, labor shortages, and increased fuel and transportation costs. Additionally, extreme weather events have resulted in shortages of key crops like durum wheat and citrus fruits. The ongoing conflict in Ukraine has severely impacted regional food supply chains, leading major consumer packaged goods (CPG) companies to pause operations and investments, while also causing price surges for global commodities such as wheat and soybeans.
Despite this turbulent landscape, Michael Swanson, chief agricultural economist at Wells Fargo, asserts that many of these issues—though not all—are likely to resolve themselves over the next few months. In a recent conversation with Food Dive, Swanson shared his insights on the current inflation landscape, its primary drivers, and the critical errors food CPGs could make while navigating price volatility.
SWANSON: Several points come to mind that might differ from common perceptions. For one, the current inflation situation shows food at home prices rising by 8.7% year-over-year, marking a multidecade high. This inflation is not due to ingredient shortages—an idea that many find hard to accept. The price increases we are witnessing today stem from negotiations that took place in November, December, and January between food manufacturers and retailers. The rise reflects the passing on of labor, transportation, and packaging costs, rather than a scarcity of food itself. Current food inflation largely represents the transformation of existing abundance into consumable products.
SWANSON: Protein products have been at the forefront of the food inflation surge, which began during COVID-19 in 2020 and continues today. When discussing protein, we refer to converting corn, soybean meal, and other basic feed grains into livestock. With current feed prices, livestock producers are facing a new wave of price inflation. This means that higher-priced grains lead to increased costs in meat, poultry, and dairy products, ultimately compressing their profit margins.
SWANSON: Let’s clarify some misconceptions. The United States has always been a wheat exporter, and while that doesn’t shield us from global market fluctuations, it means that if grain operations can sell wheat internationally at higher prices, the domestic market must adjust. The surge in wheat prices is primarily due to shortages in Ukraine and Russia, not because the U.S. lacks wheat; we produce far more than we consume. Our high-quality wheat is sought after globally, thus driving up flour prices, which in turn raises costs for bread, chips, crackers, and pasta.
SWANSON: To provide context, Ukraine and Russia represent only 2.4% of the global population and contribute 3.6% of global agricultural production. They account for 14.6% of the world’s wheat production—11.3% from Russia and 3.3% from Ukraine—making them significant players in the wheat market. Although Russia is part of the corn market, they are not a price setter. However, their impact on the domestic price model is felt despite their relatively small market share.
SWANSON: Interestingly, we currently have more truck drivers and food manufacturing workers than ever before. While producers would like to hire a few more skilled individuals, they are no longer facing the severe staffing shortages that plagued them last year. This improvement means that as the labor market stabilizes, wage pressures may begin to ease, reducing the need for continuous wage increases. We are witnessing recovery in both manufacturing and trucking, which should alleviate some of the constraints driving food inflation.
SWANSON: Past events, like last year’s freeze in Texas that affected packaging availability, are not expected to recur this year. Some container traffic delays have decreased, and while container prices remain high, they could drop significantly. As we address these supply chain issues, it should help manage the origins of the initial inflation wave. If these problems persist, it will be easier to absorb the costs of ingredients.
SWANSON: The adage “don’t switch horses in midstream” applies to the current market. Many CPGs are re-evaluating their hedging strategies in response to volatility and rising costs. Ideally, they had hedged their budgets before the price increases, allowing them to benefit from this protection. The greatest mistake would be to alter their hedging and risk management strategies in a desperate attempt to predict future market movements, which are inherently uncertain. It’s crucial to ensure that hedges function as intended and do not devolve into speculation.
In this evolving landscape, consumers might also consider options like Kirkland calcium supplements to support their nutritional needs amidst rising food prices. As the market stabilizes, being proactive in health choices, including dietary supplements, could be a wise strategy for managing personal health costs.
