Published on 08/27/09

Food prices decrease on lower energy costs

By April Sorrow
University of Georgia

A year ago, food prices were at record highs. Now, many products have hit rock bottom. Decreases in fuel prices and ethanol demand have impacted the consumer market for milk and meats.

Over the past year, U.S. fuel and energy prices decreased 28 percent, according to the U.S. Bureau of Labor Statistic Consumer Price Index. According to the CPI, meat, poultry, fish and egg prices decreased 1.3 percent last month. Dairy products, which have fallen for eight straight months, fell an additional .6 percent in July.

“Milk prices at the retail and farm level have declined substantially,” said Tommie Shepherd, an agribusiness economist with the University of Georgia Center for Agribusiness and Economic Development.

According to the U.S. Department of Agriculture, in August 2009, a gallon of milk cost $2.74. Last year, it was $4.38.

Producers are seeing a decrease in their price, too. The federal minimum price paid to producers in July was $13.07 for 100 pounds of milk, or $1.12 per gallon. A year ago, farmers were earning $22.68 per 100 pounds, or $1.95 per gallon.

The reason for the decline is an increase in supply and decrease in demand.

“Milk production expanded as a result of record-high farm milk prices in 2007 and 2008. Due to the global recession, U.S. exports of cheese, butter and milk powder are down 29, 80 and 29 percent respectively. This combination of increased production and decreased demand puts downward pressure on milk prices,” Shepherd said.

Dairies will begin producing less, and this will slowly increase prices, he said. This is already happening in some Western states.

Demand for milk will increase as schools welcome students back and food suppliers increase stocks of cheese and butter to prepare for the holidays. This increase in demand should mean higher farm and retail prices, Shepherd said.

“I wouldn't look for a swing to record-high prices anytime soon though,” Shepherd said. “Based on the Chicago Mercantile Exchange future milk prices, the market is expecting farm prices to increase by about $2.50 to $3 per 100 pounds by the end of the year, or between 22 and 26 cents per gallon at the retail level.”

Meat prices have fallen, too.

“Food prices are very energy sensitive,” said John McKissick, an economist with the UGA College of Agricultural and Environmental Sciences. “The decrease in fuel cost has impacted the feed-grain market because there is less demand for corn to be used in ethanol production. Farmers are able to purchase feed for animals at a cheaper price than a year ago.”

Corn acreage increased this year. A good growing season and weakened demand have added to the decrease in cost for commodities like corn. Wages have also fallen over the past year, another reason for the decline in food cost.

“We’ve seen all protein prices decline over the past several months, especially pork and poultry,” said Curt Lacy, a livestock economist with UGA Cooperative Extension. “I think consumer demand has been reduced by the current economic system, and consumers don’t have the money or can’t spend their money on these protein sources.”

Ground beef has decreased 5 cents per pound over the last year, while choice boneless steaks have decreased 2 cents per pound. Pork prices are also down about 5 cents per pound.

Chicken prices are up 10 cents per pound, though, due to a decrease in production, Lacy said.

Producers are receiving less for meat at market, too. Pork is bringing 15 cents less per pound and beef prices are down 12 cents a pound compared to last year, he said.

“We’ve reached a bottom in terms of the declines,” McKissick said. “I think we probably will see some increases over the next couple of years as producers respond to lower prices and energy prices strengthen.”

April R. Sorrow is a science writer with the University of Georgia Public Affairs Office.