Jason Henderson

English

Research Papers in Economics

                                Issue 2 www.KansasCityFed.org 1
Will U.S. Food Prices Follow Global Trends?
by Jason Henderson, Omaha Branch Executive
Driven by higher commodity 
prices, global food prices soared 
to record highs in 2011. World 
populations are paying record prices 
for cereals, sugars, meats and all other 
types of food products. Higher food 
prices are straining the household 
budgets of global consumers, 
especially in poorer nations where 
food spending can account for almost 
half of household expenditures. 
World populations are 
experiencing some modest relief 
as global food prices have eased 
since peaking in February. On the 
other hand, U.S. food prices have 
climbed higher in recent months. 
Differences in world and U.S. food 
consumption patterns underlie the 
divergence between global and U.S. 
food prices. Americans eat more 
processed and prepared foods than 
global consumers, which reduces the 
influence of  commodity prices on 
retail food costs. 
This article examines global and 
U.S. food price trends. During the 
past year, the surge in agricultural 
commodity prices quickly translated 
into higher global food costs, 
especially for the world’s poorer 
populations. Although commodity 
prices have driven recent global 
food price trends, the prevalent 
consumption of processed and 
prepared foods means that wages 
and labor markets more heavily 
influence U.S. food prices. As a 
result, even if commodity prices 
retreat from their historical highs, the 
larger contribution of wages to food 
production costs in the U.S. could 
limit fluctuations in U.S. food prices.
Food Prices surge
After collapsing during the 
recent financial crisis and recession, 
agricultural commodity prices have 
rebounded sharply during the past 
year. The stronger global economy  
lifted global food demand, and 
adverse weather conditions clipped 
agricultural production as drought 
and floods occurred across the globe. 
In response to burgeoning demand 
and tight supplies, raw commodity 
prices for foodstuffs jumped 40 
percent above year-ago levels and 
Federal Reserve Bank of Kansas City September 201 0
Economic information 
    for the Cornhusker State
THE
ECONOMIST:
Federal Reserve Bank of Kansas City Issue 3, 2011
Main Street
Agricultural and Rural Analysis
THE
ECONOMIST
“Higher food costs placed a heavier burden on 
poorer populations ... but modest wage growth will 
likely temper any shifts in U.S. food prices.”Main Street ECONOMIST THE
Federal Reserve Bank of Kansas City Issue 3, 2011
www.KansasCityFed.org 2
Chart 1
Global Food Prices
Source: Food and Agricultural Organization of the United Nations (FAO)
100 
120 
140 
160 
180 
200 
220 
240 
260 
280 
300 
100 
120 
140 
160 
180 
200 
220 
240 
260 
280 
300 
Jan-06  Jan-07  Jan-08  Jan-09  Jan-10  Jan-11 
Total 
Meat 
Cereals 
Index (2002 to 2004 = 100) 
propelled global food prices to record 
highs, with the largest gains emerging 
in foreign countries. 
During the past year, global food 
prices surged, echoing commodity 
price trends. After contracting in 2009, 
global food prices began to bounce back 
in 2010. By 2011, global food prices 
surged 30 percent above year-ago levels, 
surpassing the record highs set in 2008 
(Chart 1). 
Due to shrinking world crop 
inventories, the strongest global price 
gains emerged in crop-based foods. 
In 2010, global wheat and grain 
inventories plummeted to near record 
lows. In fact, by the time of the 2011 
harvest, the world will have less than 
one month’s supply of wheat and coarse 
grains. With dwindling supplies, crop 
prices surged and prices for cereals 
and oils jumped more than 40 percent 
above year-ago levels during the first 
half of 2011. Sugar prices also increased 
by a third as global supplies dropped to 
their lowest level in more than a decade. 
In contrast, meat and dairy food 
prices rose a more modest 15 percent 
and 17 percent, respectively, above year-
ago levels. In 2010, a stronger economic 
recovery boosted global meat and dairy 
consumption. While robust demand 
lifted global livestock prices, stronger 
meat and dairy production limited 
global price increases. 
In 2010, rising commodity prices 
also began to lift U.S. food prices, 
although U.S. prices rose more slowly 
than global prices. After declining 
during the recession, U.S. food prices 
began to creep higher in 2010. By 
July 2011, U.S. food prices were 4 
percent above year-ago levels, which 
still paled in comparison to the global 
price increase. 
It appears that crop-based food 
prices are limiting U.S. food price 
inflation. In July 2011, U.S. meat 
prices remained almost 10 percent 
above year-ago levels, similar to global 
trends. In contrast, crop-based food 
prices have risen less rapidly than 
global increases. While U.S. crop 
inventories have fallen sharply, U.S. 
retail prices for cereal and bakery 
products rose a more moderate 4.3 
percent above year-ago levels by July 
2011, after contracting in 2010. 
Moreover, U.S. food prices have risen 
less rapidly than they did during the 
2008 commodity price boom, when 
cereal and bakery products posted 
double-digit gains.
Why are u.s. Food Price 
Trends diFFerenT?
Weaker U.S. food price 
inflation seems to be driven by 
U.S. food consumption patterns. 
U.S. consumers eat more processed 
food at home and prepared foods at 
restaurants than global consumers. 
As a result, labor costs are a larger 
portion of U.S. food costs. Over the 
past year, sluggish wage growth in the 
U.S. has likely limited U.S. food price 
inflation. 
In more affluent nations, people 
eat more processed and packaged 
foods. Globally, packaged foods 
account for more than half of the food www.KansasCityFed.org 3
Federal Reserve Bank of Kansas City Issue 3, 2011
Main Street ECONOMIST THE
expenditures in high-income nations, 
such as the United States, compared 
to less than a third in lower income 
nations (Regmit, Takeshima, and 
Unnevehr). With additional processing, 
commodity prices play a smaller role in 
the final retail food dollar. In fact, farm 
commodities account for roughly 15 
percent of U.S. retail food costs today, 
down from 33 percent in the 1970s. 
The importance of commodity 
costs varies by food type. In the United 
States, crop-based foods tend to be more 
processed, which reduces the impact 
of commodity prices on retail prices. 
According to the U.S. Department of 
Agriculture (USDA), only 7 percent of 
the U.S. retail price of cereal-based food 
is derived from the cost of farm-based 
commodities. In contrast, almost half of 
the retail price of U.S. beef products is 
derived from commodities.1
At the same time, labor has emerged 
as the single largest cost for U.S. foods. 
Today, labor accounts for roughly half 
of the retail cost of U.S. food, up from 
less than a third in the 1970s (Canning). 
Labor is even more important for the costs 
of prepared foods consumed at restaurants. 
Over the past decade, labor costs 
accounted for almost 60 percent of the 
cost of food consumed away from home 
compared to less than half of the cost of 
food consumed at home (Canning). 
As a larger factor in U.S. foods, 
labor appears to account for the slower 
U.S. food price inflation. In 2011, 
wages in U.S. food manufacturing 
plants and restaurants rose 2 percent 
above year-ago levels, less than half 
the rate of wage growth prior to 
the recession. With sluggish wage 
growth, the price of food consumed 
away from home rose only 2.1 
percent above year-ago levels in 
2011, roughly half the rate in 2008 
and well below the price gains for 
food consumed at home (Chart 2). 
Sluggish wage growth also limited 
food price inflation for cereals and 
bakery products, especially when 
compared to the double-digit gains 
during 2008 and the steep gains in 
today’s global prices for cereals. 
WhaT is The FuTure PaTh oF 
Food Price inFlaTion?
Due to the significance of 
labor costs, global and U.S. food 
prices may follow different trends 
in the future. Global food prices 
will continue to be shaped more by 
future commodity prices, while U.S. 
food prices may be driven more by 
wages and economic growth. Even 
if commodity prices ease and trim 
global food prices, stable wages 
could temper the effect on U.S. 
food prices.
Agricultural commodity prices 
will continue to shape retail food 
prices, especially on a global scale. 
Futures markets and various public 
forecasts suggest that agricultural 
commodity prices are expected 
to remain high through 20122, 
which will keep global food prices 
elevated. In the first half of 2011, 
crop prices fluctuated widely but 
remained elevated. Yet, commodity 
prices are not expected to rise 
-4 
-2 
0 
2 
4 
6 
8 
10 
-4 
-2 
0 
2 
4 
6 
8 
10 
Jan-06  Jan-07  Jan-08  Jan-09  Jan-10  Jan-11 
CPI - Food 
CPI - Food away from home 
CPI - Food at home 
Percent change from previous year
Chart 2
U.S. Food Prices
Source: Bureau of Labor Statisticswww.KansasCityFed.org 4
Federal Reserve Bank of Kansas City Issue 3, 2011
Main Street ECONOMIST THE
Table 1 
U.S. Food Price Inflation
(Annual Percent Change)
further, suggesting that the inflationary 
implications for food prices could be 
transitory. In fact, various forecasts 
suggest that commodity prices could dip 
in 2012, before dropping more sharply 
in 2013.3 
If commodity prices are near their 
apex, global food prices may have also 
peaked. In fact, global food prices appear 
to have reached a plateau. After peaking 
in February 2011, global food prices 
remain high but have eased slightly. With 
tight global supplies and hearty global 
food demand, the Food and Agricultural 
Organization of the United Nations 
expects food prices to fluctuate at a high 
level in the near future.4 
In contrast, given the significance of 
labor costs on U.S. food prices, modest 
wage gains could lead U.S. food prices 
to rise at a modest pace.5 After falling 
during the recession, employment and 
wages at food manufacturing and food 
service firms have rebounded, rising 
roughly 2 percent over the past year. 
Still, these wage gains are half the gains 
prior to the recession when wages at 
restaurants rose more than 4 percent 
annually. In contrast to 2008, modest 
wage gains in the food sector could limit 
U.S. food price inflation. For example, 
U.S. food price inflation is expected 
to slow in 2012 and range between 
2.5 percent and 3.5 percent, roughly 
half the rise in 2008 when wages rose 
sharply (Table 1).
Today’s sluggish wage growth 
also suggests that prices for prepared 
and processed foods could rise more 
slowly than prices for foods consumed 
at home. In fact, USDA forecasts that 
the price of food consumed away from 
home will rise between 2 percent and 
3 percent in 2012, while at-home food 
prices are expected to jump between 
3 percent and 4 percent (Table 1). In 
addition, retail prices for processed 
cereals and bakery products are 
expected to rise more slowly than the 
prices of commodity-based meat and 
dairy products. 
In sum, fueled by a global 
economic rebound and tight food 
supplies, global food prices have 
soared along with agricultural 
commodity prices. Higher food costs 
placed a heavier burden on poorer 
populations, both in the United 
States and across the globe (Box 
1). Fortunately, the steep ascent in 
global commodity prices has tapered, 
trimming global food prices. 
U.S. food prices, however, are 
continuing to rise. Labor costs are 
a larger component of U.S. food 
expenditures as U.S. consumers 
eat more processed and prepared 
foods than households worldwide. 
National labor markets softened 
during the summer of 2011, limiting 
wage gains in the U.S. food sector. 
Even if commodity prices fluctuate 
at elevated levels, modest wage 
growth will likely temper any shifts 
in U.S. food prices. 
2008 2009 2010 2011 Forecast  2012 Forecast
All Food 5.5 1.8 0.8 3.0 to 4.0  2.5 to 3.5
Food away from home  4.4 3.5 1.3 3.0 to 4.0  2.0 to 3.0
Food at home  6.4 0.5 0.3 3.5 to 4.5  3.0 to 4.0
Meat, Poultry & Fish  4.2 0.5 1.9 5.0 to 6.0  4.5 to 5.5
Dairy  8 -6.4 1.1 5.0 to 6.0  3.0 to 4.0
Fats and oils  13.8 2.3 -0.3 6.5 to 7.5  4.5 to 5.5
Fruits and Vegetables  6.2 -2.1 0.2 3.5 to 4.5  2.0 to 3.0
Sugars and sweets  5.5 5.6 2.2 2.5 to 3.5  2.0 to 3.0
Cereals and bakery products 10.2 3.2 -0.8 3.5 to 4.5 2.5 to 3.5
Source: U.S. Department of Agriculturewww.KansasCityFed.org 5
Federal Reserve Bank of Kansas City Issue 3, 2011
Main Street ECONOMIST THE
The world’s poor faced the 
greatest burden from higher food 
prices. In developing nations, like 
those in the Middle East, more than 
40 percent of average household 
budgets go toward food purchases 
(Chart A1). Even in the emerging 
BRIC countries of Brazil, Russia, 
India and China, between a quarter 
and a third of household income 
is spent on food. In more affluent 
nations, like the United States, the 
average household spends less than 
10 percent of its household budget 
on food. 
Even in the U.S., low-income 
households are more affected by 
higher food prices than high-
income households. Lower-income 
households spend a larger portion 
of their incomes on food. According 
to Bureau of Labor Statistics (BLS) 
data, the poorest 20 percent of U.S. 
households had an average annual 
income of $9,900 in 2009 and spent 
over a third of that income on food 
(Chart A2). In contrast, the richest 
20 percent of U.S. households had 
an average annual income of more 
than $150,000 and spent less than 7 
percent of it on food. 
Low-income households in the 
United States also struggle more 
with higher food prices because 
they spend more money on food 
6.9 
9.2 
11.4 
14.6 
24.6 
32.4 
34.9 
38.8 
40.9 
43.9 
45.7 
0  5  10  15  20  25  30  35  40  45  50 
U.S 
Canada 
Germany 
Japan 
Brazil 
India 
China 
Egypt 
Jordan 
Pakistan 
Algeria
Percent of total household consumption expenditures, 2009 
Box 1: 
The Burden of Higher Food Prices
$1,038  $1,569  $2,127 
$3,206 
$5,151  $2,463 
$2,999 
$3,355 
$4,316 
$5,629 
0 
2,000 
4,000 
6,000 
8,000 
10,000 
12,000 
Lowest 20 percent  Second 20 percent  Fourth 20 percent 
Food at home 
Food away from home 
2009 Household Income (Quintiles) 
($9,846)  ($27,227)  ($46,012)  ($73,417)  ($157,631) 
Dollars 
Third 20 percent  Highest 20 percent 
Average
Income 
Source: U.S. Department of Agriculture
Source: “Food for Thought,” Bureau of Labor Statistics 
Note: data in parenthesis is the average household income of the quintiles
Chart A1:
Food Expenditures by Country
Chart A2:
U.S. Household Food Expenditures  
by 2009 Income Levelswww.KansasCityFed.org 6
Federal Reserve Bank of Kansas City Issue 3, 2011
Main Street ECONOMIST THE
consumed at home. During the recent commodity 
price booms of 2008 and 2011, prices of food at-
home rose more sharply than food consumed away 
from home. In 2009, U.S. households with the lowest 
level of income spent almost three-quarters of their 
food budgets on food at home, while high-income 
households spent roughly half of their food budgets on 
food at home. 
Finally, low-income populations have less flexibility 
than higher-income households to alter their food 
consumption patterns, which increases the stress of 
higher food prices on their household budgets. When 
food prices rise, consumers buy cheaper foods, often by 
eating at less-expensive restaurants and purchasing more 
food at grocery stores to eat at home. Since low-income 
populations already spend most of their food budget on 
at-home food consumption, it is more difficult for them 
to make changes and avoid paying higher food prices. 
When food prices rose sharply in 2008, U.S. households 
with the lowest level of income spent 15 percent more 
on food than they did in 2007. In contrast, U.S. 
households with the highest level of income spent only 5 
percent more on food as they shifted their spending from 
restaurants to home-cooked meals. 
Box 1 continued
Endnotes
1Farm to retail price spreads are available at www.ers.usda.gov/
Data/FarmToConsumer/pricespreads.htm
2USDA monthly projections for the price of corn, soybeans, 
and wheat based on futures markets suggest the crop prices 
will remain high through the 2011/2012 crop year. 
3Long-term forecasts of U.S. agricultural production, prices 
and profits are available at the U.S. Dept. of Agriculture 
http://www.ers.usda.gov/briefing/baseline/ and the Food and 
Agricultural Policy Research Institute, http://www.fapri.
missouri.edu/outreach/publications/2011/FAPRI_MU_
Report_02_11.pdf.
4For additional information on the 2011/2012 outlook for 
global food prices, see the FAO’s, Food Outlook, http://www.
fao.org/docrep/014/al978e/al978e00.pdf
5For additional information on the U.S. food marketing bill 
see Canning.
References
Canning, Patrick. 2011. “A Revised and Expanded Food 
Dollar Series: a Better Understanding of Our Food Costs.” 
Economic Research Service Report Number 114, Economic 
Research Service, U.S. Dept. of Agriculture, February. http://
www.ers.usda.gov/Publications/ERR114/ERR114.pdf
Ferreira, Francisco H.G., Anna Fruettero, Phillippe Leite, 
and Leonardo Lucchetti. 2011. “Rising Food Prices and 
Household Welfare” World Bank, Policy Research Working 
Paper 5652.
“Food for Thought”, Bureau of Labor Statistics, November 
2010 www.bls.gov/spotlight/2010/food/pdf/food.pdf
Regmit, Anita, Hiroyuki Takeshima, and Laurian Unnevehr. 
2008. “Convergence in Global Food Demand and Delivery,” 
Economic Research Report Number 56, Economic Research 
Service, U.S. Dept. of Agriculture, March. www.ers.usda.gov/
Publications/ERR56/ERR56.pdf.

A Revised and Expanded Food Dollar Series: a Better Understanding of Our Food Costs.” Economic Research Service Report Number 114, Economic Research Service,

www.bls.gov/spotlight/2010/food/pdf/food.pdf Regmit, Anita, Hiroyuki Takeshima, and Laurian Unnevehr.

Will U.S. food prices follow global trends?

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Will U.S. food prices follow global trends?

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