The Fundamentals of Food Prices: Costs, Consumer Demand, and COVID-19

During the COVID-19 pandemic, grocery prices have increased considerably. COVID-19 has affected grocery prices more than nearly any other category of consumer spending. This experience looks at the factors in the food supply chain that impact food prices and the specific impact of the COVID-19 pandemic on food prices.

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How Has COVID-19 Impacted Food Prices?

0.3% The Food-at-Home CPI increased 0.3% in February 2023, with five of the six major grocery store food group indexes increasing over the month.

10.2% Grocery prices are up 10.2% from February 2022 to February 2023, as cereals and bakery products are up 14.6% while fruits and vegetables rose 5.3% over the year.

The Food Supply Chain

There are three key pieces of the food supply chain: production, processing, and retail.

The Food Supply Chain

Production: Farmers and ranchers grow the raw agricultural commodities.

The Food Supply Chain

Processing: Manufacturers turn these raw commodities into consumer-ready foods.

The Food Supply Chain

Retail: Retailers aggregate these foods and make them available to consumers all under one roof.

Influences Along the Food Supply Chain on Prices

Each part of the food supply chain contributes a portion to the food dollar:

dollar-graph

Source: USDA Economic Research Service. Represents food dollar at home nominal data for 2018.

Influences Along the Food Supply Chain on Prices

There are factors outside of the retail sector that also influence prices including:

Influences Along the Food Supply Chain on Prices

There are factors outside of the retail sector that also influence prices including: Population
Growth

Influences Along the Food Supply Chain on Prices

There are factors outside of the retail sector that also influence prices including: Slowdown of Agriculture productivity

Influences Along the Food Supply Chain on Prices

There are factors outside of the retail sector that also influence prices including: Weather

Influences Along the Food Supply Chain on Prices

There are factors outside of the retail sector that also influence prices including: Trade

Four COVID-19 Factors Contributing to Food Price Increases

At every stage of the food supply chain, costs increased due to the pandemic.

Factor #1: The Shift to Eating at Home

In February 2020, 52% of all household food spending was away from supermarkets and other grocery stores. Two months later, in April 2020, it was 34%. Approximately $23 billion in spending away from home was redirected toward the grocery sector in a matter of two months.

Factor #2: The Loss of Foodservice Demand

When the food-away-from-home demand contracted, growers and ranchers lost one of their key marketing channels. With no buyers, it is costly or impractical to harvest, preserve, or store raw and intermediate food and beverage products.

Factor #3: Increasing Production and Processing Costs

Companies have needed to make investments and adaptations to safeguard their products from contamination. Labor costs are up due to increased turnover, additional training costs, and decreased immigration during the pandemic. To the extent that firms have been able to divert their products away from foodservice and towards retail, this process entails significant costs and regulatory hurdles.

Factor #4: Increased Operating Costs for Grocery Stores

The Grocery Stores PPI, which can be interpreted as a measure of supermarket operating costs, was up 7.9% in April 2020 and 6.7% in May 2020, over 2019. These spikes reflect the significant costs associated with adapting to COVID-19.

Factor #4: Increased Operating Costs for Grocery Stores

Grocery stores have invested in plexiglass barriers, labels, and markers. High margin bulk sections, salad bars, and hot food delis have all been shut down. Labor and overhead costs have increased sharply as stores are sanitized more frequently and rigorously.

Factor #4: Increased Operating Costs for Grocery Stores

Transportation and costs of acquiring goods are up as retailers across the country have expedited their orders for products subject to stockpiling, and rushed, or expedited, logistics costs are higher than those for regularly scheduled shipments, due to increased labor costs, higher trucking rates, and other factors.

On February 24, 2022 Russia Invaded Ukraine

This geopolitical situation is having a ripple effect on food prices. The cost for raw materials and finished goods is being driven higher at a time when supply chains continue to face impacts from the pandemic and Americans are already experiencing significant inflation.

Impact of the War on Supply Chain and Food Prices

Wheat

Russia and Ukraine are two of the world’s largest exporters of wheat, accounting for 29% of the global wheat export market. Import bans on Russian products and the devastation to Ukraine’s agriculture sector are causing a significant reduction in the global wheat supply, which will push up prices for wheat and the products it is used to make, like bread and pizza dough.

Edible Oils

Ukraine is the largest exporter of sunflower seed oil, a key component of the world’s vegetable oil supply. Together, Russia and Ukraine supply 75% of global exports of sunflower oil, which is an ingredient in many products found in the center aisles of the grocery store. Reduced supply of this edible oil will further increase the cost to produce baked and packaged goods, which are also facing price pressures due to reduced wheat supply.

Energy

Increases in oil and gas prices due to the conflict will further exacerbate already-high food production and transportation costs and contribute to higher prices and short-term product shortages.

Impact of the War on Supply Chain and Food Prices

Wheat

Russia and Ukraine are two of the world’s largest exporters of wheat, accounting for 29% of the global wheat export market. Import bans on Russian products and the devastation to Ukraine’s agriculture sector are causing a significant reduction in the global wheat supply, which will push up prices for wheat and the products it is used to make, like bread and pizza dough.

Wheat

Russia and Ukraine are two of the world’s largest exporters of wheat, accounting for 29% of the global wheat export market. Import bans on Russian products and the devastation to Ukraine’s agriculture sector are causing a significant reduction in the global wheat supply, which will push up prices for wheat and the products it is used to make, like bread and pizza dough.

Impact of the War on Supply Chain and Food Prices

Edible Oils

Ukraine is the largest exporter of sunflower seed oil, a key component of the world’s vegetable oil supply. Together, Russia and Ukraine supply 75% of global exports of sunflower oil, which is an ingredient in many products found in the center aisles of the grocery store. Reduced supply of this edible oil will further increase the cost to produce baked and packaged goods, which are also facing price pressures due to reduced wheat supply.

Edible Oils

Ukraine is the largest exporter of sunflower seed oil, a key component of the world’s vegetable oil supply. Together, Russia and Ukraine supply 75% of global exports of sunflower oil, which is an ingredient in many products found in the center aisles of the grocery store. Reduced supply of this edible oil will further increase the cost to produce baked and packaged goods, which are also facing price pressures due to reduced wheat supply.

Impact of the War on Supply Chain and Food Prices

Energy

Increases in oil and gas prices due to the conflict will further exacerbate already-high food production and transportation costs and contribute to higher prices and short-term product shortages.

Energy

Increases in oil and gas prices due to the conflict will further exacerbate already-high food production and transportation costs and contribute to higher prices and short-term product shortages.

Dive Deeper Into Food Prices

The Fundamentals of Food Prices: Costs, Consumer Demand, and COVID-19

This report provides a broad overview into the factors that determine food prices in the U.S. and looks specifically at how COVID-19 has affected food prices so far.

Download Report

Fact Sheet: Russia-Ukraine Crisis and its Impact on Food Prices

These talking points outline the impact of the Russia-Ukraine Crisis on food prices.

Download Fact Sheet

Fact Sheet: The Fundamentals of Food Prices: Costs, Consumer Demand, and COVID-19

The pandemic upended the food supply chain and continues to have an effect on food prices. This fact sheet provides some details.

Download Fact Sheet

FMI Feeding Assistance Toolkit

Help shoppers who are most in need. This toolkit hosts meal-time solutions, ideas for ingredient substitutions, information on food banks and how to enroll in and use food assistance programs.

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