Food Price Outlook For 1999: An Update.

The Consumer Price Index (CPI) for all food is expected to increase 2 to 3 percent in 1999, following a 2.2 percent increase in 1998. Food at home is projected to rise 2 to 2.5 percent, while food away from home should increase 2.5 to 3 percent. The 1998 all-food increase was the smallest since 1993 and follows the USDA baseline projection of an average growth rate of 2.3 percent from 1998 to 2008.

Although 1999 looks like another year of low food price inflation, uncertainties remain that will influence whether the increase for all food is closer to 2 or to 3 percent. Will the sluggish export market for beef and higher valued cuts of pork and poultry continue throughout 1999? Can the expected 2 percent increase in milk production meet consumer demands for butterfat products in 1999? And will higher expected retail prices for oranges and bananas continue longer than the first 6 months of 1999?

The food categories involved in these uncertainties--beef, pork, and poultry; dairy and related products; fats and oils (including butter); and fresh fruits--together account for 39 percent of the food-at-home CPI. Thus the answers to these questions will be determining factors in the final figure for 1999.

Retail food price changes are underpinned by general economic factors that influence both food prices and the relationship between farm and marketing costs. Increasing economies of size in the farm sector continue to reduce the cost of producing food at the farm level. At the same time, the farm value share of the retail cost of food continues to decline as consumers pay for additional processing and services to reduce the time required for food preparation. The share of the consumer food dollar going to purchase food away from home has increased steadily, averaging 45 percent for the past 2 years, while the farm-value share of the retail price for food items is expected to average only 23-24 cents on the dollar for 1998 and 1999.

As post-farm gate processing and services take up an increasing proportion of the food dollar, the retail price of food increasingly reflects the general inflation rate in the wider economy. In recent years, food price increases have been small, in line with the low general inflation rate, which was only 1.9 percent in 1998 and is forecast to be around 2-3 percent in 1999.

Food price changes are a key variable in determining what proportion of income consumers spend for food and what is left for purchases of other goods and services. In 1997, 10.7 percent of household disposable personal income went to pay for food, with 6.6 percent for food at home and 4.1 percent for food away from home, down from 10.8 percent in 1996. The downward trend in the proportion of household disposable personal income used for food should continue into 1998 and 1999. Preliminary figures (inflation-adjusted) on food sales for 1998 show food-at-home spending went down 0.1 percent, and spending on food away from home went down 1.5 percent, while per capital disposable income rose 3.1 percent. With continued competition among grocery stores, restaurants, and fast-food establishments, the same pattern is expected through 1999.

The food-at-home CPI increase of 2.2 percent in 1998 was kept moderate by lower grain prices and adequate feed supplies, large supplies of competing meats, adequate supplies of coffee, increased sugar production, and strong competition in the soft drink and prepared food industries.

The 1998 CPI increase of 2.6 percent for food away from home was smaller than in 1997. Continued strong competition among restaurants and fast food establishments kept pressure on prices, while lower costs for raw materials, especially food, kept costs down.

Overall food price increases in 1998 were influenced largely by three circumstances Large consumer demand coupled with stagnant milk production contributed to higher retail prices for dairy products, especially high butterfat items.

Reduced fresh fruit and vegetable supplies resulting from damages inflicted by El Nino weather patterns and Hurricane Mitch led to substantial retail price increases for those foods. And modest increases in the indexes for sugar and sweets, cereals and bakery products, and other foods were the result of adequate supplies and a small increase in the general price level, which contributes to manufacturing, processing, and marketing costs.

Overall food price decreases in 1998 may be accounted for by large, competing supplies of meats that led to retail price decreases for beef and pork; lower feed prices that led to larger egg production and a consequent drop in retail prices; and adequate coffee supplies and competition among soft drink producers for market share that lowered the prices for these items in the nonalcoholic beverages index.

Annette L. Clauson, 202-694-5373. [e-mail]