Producers know price volatility—they experience volatility in commodity and livestock prices regularly. Price volatility at the farm or ranch gate, though, does not translate up the food chain into price volatility on food products at the retail level.
A report by the USDA Economic Research Service (ERS) provides an example, “the production-weighted farm price of corn, wheat, and soybeans increased by 43 percent in 2011. That same year, the Producer Price Index for intermediate foods and feeds, a category of processed foods such as wheat flour and soybean oil, rose 12 percent. Retail food prices—as measured by the Consumer Price Index for all foods (food purchased in stores and eating places)—rose just 4 percent.”
The USDA ERS offers a couple reasons why price changes at the farm gate do not translate into changes at the retail level. First, a lot of processing, packaging, and marketing occurs before commodities reach the grocery shelves as food products. Processing, labor, energy, packaging, transportation, and marketing costs are all incorporated into the final price paid by consumers. As a result, the commodity share of the ultimate product cost is minimal and commodity price changes do not materially affect overall cost at the retail level. The farm share of a dollar spent by consumers on food equaled 14.6 percent in 2018.
Second, the retail grocery business is competitive with national and regional chains and local stores competing for retail dollars. These entities use contracts to give them greater control over product lines and product costs to smooth price changes to customers. Restaurants, too, want to keep prices stable to limit menu changes and keep customers coming back. Thus, structure and needs of industry players also contribute to greater price stability at the retail level.
Figure 3. Annual percentage changes in prices, 1999-2019