By Epiphany Communications and Coaching*
Frank Ayar, owner of Walters Shopping Place in Hamtramck, Michigan is closely looking at his invoices these days as prices are increasing at a rapid rate and more frequently. “We’re not even getting warnings,” said Ayar. “We are getting page after page of prices increases without any heads up.”
The cost of grocery is up by 13.5% in the past year, the largest increase in 43 years, according to recent reports.
Speaking on PBS News Hour late last year, David Ortega, associate professor, and agricultural economist from Michigan State University pointed out the supply chain disruptions from COVID-19 are still lingering. “Those lead to rising energy prices, rising transportation costs, rising labor costs. On average, 16¢ out of every dollar spent on food can be tied back to the farm,” he said. “Everything else, the vast majority, has to do with things like processing cost, transportation, the wholesale, and the retail trade. And we have seen all those prices go up.”
Price increases are continuously working their way into the food chain. The industry and its customers are hit on all fronts including input costs, production costs, supply chain costs, and then operating costs of the retailers who sell the products. “On top of those pressures, we have the ever-present competitive forces that helped actually keep inflation from being worse last year,” said Dr. Russell J. Zwanka, Western Michigan University Food Marketing Director. “Yes, inflation was bad last year. Yes, it could have been even worse.”
Dr. Zwanka looks at input costs, a confluence of the feed for cows massively impacting the prices of butter and dairy, and of course red meat. “Those factors alone would cause a large ripple in the costs of multiple foods, since dairy products are a base ingredient in so many of the foods we enjoy,” he said. “Then we have had a terrible avian flu outbreak that has impacted egg pricing, as the “egg layers” have died at an alarming rate. And it keeps going, wheat prices for bread and cereal, feed prices for pigs, over-fishing for seafood, and even the chicken sandwich wars. Chickens raised for consumption only have two breasts, and the chicken sandwich wars from the major fast-food chains have made chicken breasts a hot commodity.”
As experts note, the increased production costs come from variables like fuel and energy usage, declining birth rates and workforce participation, and the regular cycle of weather events. Food is harvested, produced, picked, or killed but then there is a trucker and container shortage on top of fuel price increases. “Once everything makes it to the store, you still have labor shortages, workforce participation issues, and the increased expenses of running a people business like grocery. Healthcare costs, benefit costs, and increased wage demands or mandates, all impact operating costs,” said Dr. Zwanka. “All along the supply chain, different from portrayals in many media outlets, most manufacturers, consumer packaged goods companies, and retailers only passed on a portion of the cost increases to the costs and subsequent retail pricing did not truly reflect the massive amount of inflation we have seen in the supply chain. Competitive pricing pressures are not always linked to acquisition costs, and so many in the food chain swallowed a good portion of the increases.”
The ongoing inflation is now forcing many companies to pass on those costs to survive and Dr. Zwanka notes that this year retailers are going to be stretched. “When the costs of operating companies continue to increase, and costs of production continue to increase, the only release of pressure is through cost and retail increases,” he said.
Dr. Zwanka looks at the competitive forces. The same forces that caused a slow trickle of increases to then become a firehose of increases will also eventually work in the customer’s favor. “Customers change buying patterns, trade into store brands from national brands, cook at home more, and will move away from a commodity that has become too expensive,” said Dr. Zwanka. “They may love eggs, but the cost is so high they switch to oatmeal or even places like McDonald’s. Yes, McDonald’s is a super value alternative to eating eggs at home, and every customer can compute that value equation.”
The egg supply will start to build as demand decreases, which will decrease costs of perishable products, noted Dr. Zwanka. “As a double-edge to that sword, though, decreased selling costs will then lead to an increased focus on efficiency,” he said. “Efficiency can come in multiple ways: less labor, less assortment, lower wages, lower benefits, consolidation of suppliers, consolidation of retailers. Scale still works in this economy, and that will be a big push, as effectiveness through efficiency will be the next focus.”
The weather in the country also plays a role especially in the west like California where most places acquire produce. “And a lot of those crops are lower in yield because of heat stress, some failed crops, and that’s less food available in the market, all of which puts upward pressure on prices,” said Ortego on PBS News Hour.
The bird flu outbreak last year is a factor. “It’s the second largest outbreak we have seen in modern history,” Ortego continued. “It’s affected over 40 million birds, many in commercial operations. And that sent the price of poultry and eggs surging.”
In 2021, The Economist reported that high food prices are here to stay, noting that COVID-19 disruptions weren’t the only reason. In September of that same year,
the UN hosted a “people’s summit” on global food systems in an effort to tackle a very concrete problem: how to make the food supply chain fairer, greener and healthier. An index compiled by the Food and Agriculture Organization, a UN agency, shows that food prices were a third higher in August than a year before. They continued to rise over several months leading up to the summit.
“When prices go up, you rarely seem them come down in any significant way,” said Phil Kassa, co-owner of Heartland Marketplace while attending MIRA’s Annual Innovation Show at Andiamo’s. “We are seeing that with the gas prices as well.”
*Writers with Epiphany Communications and Coaching are content creators for Bottom Line.