Why Does Food Cost So Much?

Photo: Annie White

I am at Whole Foods in Toronto, where I just bought two plums and a banana for almost $5.00. Steep prices are standard at fancy Whole Foods. But in fact, no matter where you get food – from Safeway to Trader Joe’s, to T.G.I. Friday’s – price tags have become significantly higher than they were ten years ago, reflecting prominent trends in the global demand for food and the costs involved in supplying it. There may never be a free lunch, but it’s getting harder to find even a cheap lunch.

Trends in Food Prices

World food prices have been increasing steadily and experienced a major spike between 2005 and 2008. During this time, average world prices for rice rose by a staggering 217%. In response, some retailers — like Sam’s Club — instituted a limit on how much rice restaurants could purchase. Globally, concern mounted over the ability of the food supply chain to meet demand. By mid-2008, countries began restricting exports, reflecting concerns about their own domestic food security.

The downturn in the economy burst this bubble and reversed some of the pre-crisis surge, partly by reducing consumption. Livestock numbers were cut, reflecting weaker demand for meat. Stocks of agricultural commodities started to build up, which put downward pressure on prices. Energy prices also fell, reducing the costs of fertilizers, distribution and storage. Modest economic recovery forecasts suggest that another devastating agricultural commodity-price bubble is unlikely. Still, in the medium term, global food security will re-emerge as a leading political, economic and health issue, led in part by a rise in prices.

What is Causing Prices to Increase?

The Financial Times points out that food prices are affected by four major trends, predominantly the changing diet of the developing world. As densely populated countries such as China, India and Brazil become richer, the demand for meat and dairy soars (which in turn increases demand for corn and grain to feed animals). Further, an increase in wealth encourages the opening of more supermarkets, where people are more apt to spend their money on a wider array of impulse purchases and non-seasonal foods. Thanks to population growth, urbanization and rising incomes, this increased food consumption outstrips supply. Scarcity ensues and prices adapt upwards.

A newer trend affecting food prices is the uptake of biofuels. In the past, US subsidies acted as a way to hold down the price of corn and encourage its use as cheap food. Now, this policy works the other way, where subsidies effectively raise prices and diminish the amount of corn available for food. Although George W. Bush had set a target for 15% of cars in America to run on corn-made biofuels by 2017, a more effective strategy would be to import ethanol from Brazil, where sugar cane is converted to fuel much more efficiently. That’s not possible, however, because of US-imposed tariffs.

Ironically, while the use of biofuels is aimed at mitigating climate change, it is climate change that makes biofuel production volatile. Rising temperatures and extreme weather events make it difficult to predict harvests in food-producing countries. The rise in grain prices from 2006 to 2008 was partly the result of drought in Australia. Cocoa and coffee prices soared in 2009 due to poor harvests in West Africa, South America and Indonesia, also caused by drought. As with any shortage, prices rise as a result. When the cause is weather patterns, uncertainty prevails.

The final cause of increasing food prices is the increased cost of inputs: energy, land, seed and fertilizers. As the price of oil increases, so to does the cost of operating machinery, the price of nitrogen fertilizers and the cost of shipping. Developing countries are hit particularly hard, mainly due to their reliance on imports and basic losses in productivity. With a sharp increase in production costs, commodity prices will trade higher to maintain farmer’s profits. This cost is passed on to the final price of food.

The Outlook

By understanding the global factors of modern food pricing, it becomes clear that there is little chance that your grocery bill will see any relative decrease. Add to this the increasing costs of marketing and transportation and you get the picture. The US Department of Agriculture forecasts overall food prices will continue to rise between 4 to 7% over the coming years, while wholesale food prices will continue to rise their fastest since 2003. Anthony Conti, executive vice president at Agar Supply, a food distributor, says there is little doubt consumers will continue to pay more. “Every day we get notices from manufacturers that prices are going up.”

I’m still at Whole Foods, by the way — only now I’m thinking about dinner. A basic winter salad will come close to $11.00. Swiping the MasterCard and entering the purchase in my budget spreadsheet later, I’ll be tempted to wring my fist at Whole Foods for the mark-up. But the story of what we pay for our food goes beyond the retailer, no matter if it’s fancy Whole Foods or the practical Walmart.