What causes dramatic increases in food prices?

Ask an Economist

I'm just an average joe, but I thought I had a decent grasp on inflation and top down economics. I don't understand, however, why the cost of EVERYTHING continues to rise in leaps and bounds. Yesterday, I went to Sam's Club and passed on a can of cashews priced at $18. I'm certain last year I was debating whether or not they were worth $13. I'm almost certain that the cost of picking and packing nuts hasn't increased that dramatically; how can they justify an almost 50% increase in price? I've noticed that the cost of eggs has increased everywhere; a dozen eggs are almost $4, the expensive ones used to be $1 and some change. Am I to believe it costs 400% more now than it did five years ago for chickens to lay eggs? The cost of butter has increased at the same rate of eggs, so I can see whatever is affecting the chickens are affecting the cows as well... This question was prompted when I noticed that the $18 cashews were close to the same price as the honey which was comparable to the price of shrimp. No way you can tell me it costs the same to harvest honey, nuts and shrimp! For whatever reasons I know that the cost of gasoline has increased 400% since I first started driving less than twenty years ago; although it is declining significantly now, but why does a gallon of milk cost more than a gallon of gas? Who is controlling this stuff?


Let me answer the last question first. The markets are controlling the prices, based on supply and demand. So, depending on how you want to look at it, either everyone or no one is controlling the prices. Let’s dive into the factors that have shaped supply and demand for a few of these products. For example, the egg market was heavily impacted by avian influenza. Iowa is the top producer of eggs nationwide. But over the last twelve months, many of the flocks of birds in Iowa and surrounding states were infected with avian influenza, which led to the elimination of those flocks. This reduced egg supplies significantly, and egg prices rose. As the impacted egg producers raise new flocks of birds for egg laying, egg prices should moderate. We saw a similar pattern with the price of shrimp after the Gulf oil disaster. Price movements can also be triggered by demand shifts. For example, earlier this year, McDonalds announced it would move from margarine to butter in all of its U.S. restaurants. That shift in demand helped raise butter prices.

The cost of farm products is actually a relatively small share of the cost of food at the grocery store. The Economic Research Service of the U.S. Department of Agriculture tracks the cost of food and the share of food costs represented by the various stages of the food marketing chain. The data can be found at http://www.ers.usda.gov/data-products/food-dollar-series/food-dollar-app.... Based on 2013 data (the latest data currently available), the farm share of the food dollar is 17.4 cents. That is, for the average dollar spent for food in the U.S. in 2013, 17.4 cents went back to pay the farmer for the raw food product. 82.6 cents of the average food dollar covered the costs beyond the farm gate, from packaging and transportation to marketing and labor. The farm share of the food dollar has been fairly steady over the past twenty years, holding between 15 and 20 percent.

Answered by:
Dr. Chad Hart