Here’s why your food prices keep going up

Before the pandemic, most people may not have thought much about where their food came from, how far it traveled or how it was produced. Certain industry phrases have underscored rising grocery bills over the past 18 months. “Turbulence and volatility.” “Unprecedented times.” But one of the biggies is “supply chain disruption.”

Food producers have struggled with shortages, bottlenecks, and transportation, weather and labor woes, all of which have caused food prices to rise. The end is not in sight: Inflation at the wholesale level climbed 8.3 percent last month from August 2020, the Labor Department reported Friday, the biggest annual gain since the department started calculating the number in 2010. Those prices are passed on to consumers: Meat, poultry, fish and eggs are up 5.9 percent over last year, and up 15.7 percent from prices in July 2019, before the pandemic.

The Bureau of Labor Statistics on Tuesday, reported an additional overall food price increase of 0.4 percent in August compared to July, after larger increases in recent months.

Sysco, one of the nation’s biggest food distributors, showed food inflation of 10.2 percent on its most recent quarterly report, increases that are passed along to restaurants and to the restaurants’ customers in turn.

“History shows us that price adjustments are more likely to be accepted in the market when industry-wide and broad-based input cost inflation occurs,” David Marberger, chief financial officer of Conagra Brands, one of the world’s largest food companies, said in the company’s third-quarter 2021 earnings call. “And that’s the environment we see today.”

Translation: They are paying higher prices, they are charging higher prices, higher prices are everywhere.

Eighteen months into the pandemic, why are there still supply chain problems?

From Gatorade to Lunchables, bananas to anchovies, things still can’t easily get to where they need to be. Across the board, ingredient suppliers see longer lead times because of lack of staffing, ingredient shortages and the unpredictability of trucking and container ship transport. In many cases, those lead times have dragged out to eight to 12 weeks, with food manufacturers stalled out waiting for ingredients for their products, according to Rifle Hughes, innovation and strategy business partner at JPG Resources, which develops foods for major companies. He says that products in the center aisles of the grocery store — canned goods, snacks, cereals — tend to require many different ingredients, often sourced from around the world, and that this year’s extreme weather, labor problems and shortages are leading to “deeper and longer-running disruptions” than even last year.

The baking industry, which tracks prices of core inputs including sweeteners and cocoa, reports price hikes in 49 of the top 50 ingredients, says Robb MacKie, chief executive of the American Bakers Association. The group expects prices of baked goods to rise another 5 to 10 percent in all categories between now and the end of the year. For example, sweetener costs have increased across the board, with the recent hurricane shutting down sugar cane refineries in Louisiana and drought shriveling the sugar beet yields in the Upper Midwest. And even corn and other sweetener prices are seen rising by double digits, MacKie says. “The global supply chain has been twisted in so many knots, so things you might have put on a truck or train, you might now have to pay airfare, which is much more expensive.”

The closures and reopenings of different industries, coupled with the surges and lags in consumer purchasing during the pandemic, have caused an “accordion effect,” says Shelby Swain Myers, an economist for American Farm Bureau Federation, with lots of industries playing catch-up even as they see higher consumer demand (as many Americans now have more money to spend, Myers said). And lower supplies of items such as grains to feed livestock in other countries has led to increased U.S. exports, which has further driven up domestic prices, according to Myers.

In addition, global shipping continues to be snarled at ports. “The wait to get into the port at Long Beach [in California] is almost eight days, and we have 56 ships backed up at any given time. There are reports of container ships turning around and not even waiting to get refilled,” said Andy Harig, the vice president for tax, trade, sustainability and policy development for the Food Marketing Institute, an industry association.

About 80 percent of traded goods travel by shipping container. The containers themselves cost more. Last year, transporting a 40-foot steel container cost $1,920; today, the cost can be more than $14,000, according to Brittain Ladd, chief marketing officer at Kuecker Pulse Integration, a robotics and logistics automation company in Kansas.

At the peak of the pandemic, companies canceled sailings and rerouted ships to the most profitable routes to minimize losses, with empty containers stranded at sea or stacked up where they shouldn’t be, rather than being returned full. Even though China, which manufactures most of the world’s containers, has bumped up production, demand is outstripping supply. “After the shutdown of the economy in 2020, in early 2021, demand for everything exploded,” Ladd said. “A lot of companies just weren’t ready, so there was a big imbalance of cargo containers. Immediately the rates started to spike.”

How do packaging problems send grocery prices higher?

For many food products, it’s not just shipping and ingredients that have risen in price, but also the product packaging.

In Texas, one of the country’s largest producers of plastics, factories shut down last winter because of power outages during an anomalous cold snap, and the country is still short of packaging products because of this, says Michael Swanson, Wells Fargo’s chief agricultural economist. This has caused a spike in the price of the polyethylene used to make milk jugs and vinegar bottles, the PVC used to make items such as tamper-resistant lids and breath mint packs, and the low-density polyethylene for six-pack soda can rings and grocery stores’ produce bags.

Separately, a shortage of wooden pallets, traced to last spring’s coronavirus shutdown at mills, also is still affecting food prices, Swanson says. Last month, aluminum prices hit their highest level in 10 years — higher even than during the trade wars during the Trump administration — and this affects a vast range of goods. And with corrugated cardboard hitting all-time-high prices in February, in part because of the pandemic spike in e-commerce, food companies are incurring higher costs in boxing, canning and packaging their products.

Is anyone taking advantage of the pandemic?

With so much upheaval caused by the coronavirus and extreme weather, it’s easy to see why some food prices are spiking. But some at the White House are raising questions about whether U.S. meat companies are exploiting the pandemic to raise prices.

A big chunk of the overall increase in grocery prices is coming from big price increases in beef, pork and poultry. And in a press briefing last week, National Economic Council Director Brian Deese pointed to beef and pork, in particular, as showing double-digit price increases over the past couple of months.

Some of this is to be expected: Severe heat and drought in the U.S. West have killed hay that cattle eat and made water prohibitively expensive, and many ranchers have sold their animals or slaughtered early, a predictor of smaller herds next year.

And pork producers have had to take new measures to find enough workers for their processing facilities amid a labor shortage and a workforce battered by covid-19. For example, Triumph Foods, a hog processor in Missouri, announced a wage increase of $2.75 per hour for all employees this month, an increase that will trickle down to pork product pricing at the grocery store.

The Biden administration is suggesting that some of the high meat prices during the pandemic are a consequence of consolidation in the industry, with 80 percent of cattle slaughter done by just four companies and 70 percent of the U.S. hog market controlled by the same number.

In July, the federal government committed more than $655 million to help smaller meat processors compete with larger competitors, part of an executive order aimed at promoting market competition. Agriculture secretary Tom Vilsack said in a recent news briefing, “There’s reason for concern here. The Department of Justice recently had a price fixing case involving Tyson, where clearly there was some wrongdoing that took place. And so it’s not something that we we’re dreaming up here. The profits are real.”

One meat industry trade group, the North American Meat Institute, pushed back against the White House’s suggestion of wrongdoing, asserting that price increases for meat were caused by the same pandemic market shocks and severe weather that are affecting other industries.

Are there bright spots? What foods’ prices will not rise steeply?

Produce prices seem to have been less affected by inflationary trends, particularly on the vegetable side, says FMI’s Harig. But it’s spotty. He checks off categories that have been hurt by drought and high temperatures in the West: Heat waves cooked Washington state’s sweet onions to mush; tomato and melon growers in California have struggled. But broadly, he says, there will be affordable alternatives in grocery stores, often imports from Mexico and farther south.

Even in California’s Central Valley, the drought has not affected all areas and crops equally, says Daniel Sumner, an agricultural economist at University of California at Davis. Growers diverted precious water to irrigate tree nuts and away from cotton, wheat and alfalfa. Those crops might permanently disappear from the state. And many California rice growers sold their water and left fields unplanted. Sumner says Japanese and Korean food fans are likely to see a 20 percent hike next year in the price of japonica (sushi) rice, and Napa and Sonoma valleys’ diminished grape crops this year will drive wine prices up next year. Overall, California produce prices shouldn’t go up too much, he says.

That doesn’t mean there won’t be any pricing problems for consumers. As the threat of coronavirus infection has grown and receded and grown again, Americans have toggled between eating most of their meals at home and eating out more, behavior changes that have meant food producers and distributors have had to reshuffle their deliveries and make costly package-size changes, says Veronica Nigh, senior economist at the American Farm Bureau Federation. And the move among households to buy more fresh fruits and vegetables has left less for the manufacturers of frozen products, purées and juices, says JPG Resources’ Hughes. Consequently, those prices are likely to continue to rise.

How long will higher prices continue?

Next year, food-at-home price increases are expected to ease little, between 1.5 and 2.5 percent, down from 2.5 to 3.5 overall in 2021, according to the USDA. “The writing is already on the wall for a slowdown and slight reversal of food prices in 2022,” said Wells Fargo’s Swanson. Future sales of major grains and oilseeds are lower across the board for next year, he said, adding, “Of course, weather always has the final say as to when that actually occurs.”

Historically, meat and animal products have been more volatile than other categories, but Swanson says that meats have led price increases and are likely also to lead the softening and slight reversals.

Where prices may remain high is in restaurants and other food-away-from-home venues. “Restaurant prices have been rising at higher-than-normal rates,” said Jayson Lusk, the head of the Department of Agricultural Economics at Purdue University. “There are a variety of drivers, but rising wage rates and lack of workers are key factors.”