Input Cost Inflation, Droughts, and Plauges Driving Up Food Costs

Dec 13, 2022 | Macro Insights, No Bull Economics

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Material food price increases are driven by input cost inflation (energy, fertilizer, freight & warehousing) which is aggravating modest harvests that are stressed by droughts and plagues like the Avian Flu.

The RR Commodity Index is calculated by weighting individual commodity PPIs by a food basket typical for fast food restaurants with notable y/y hikes during October, including: chicken +20%; eggs +204%; pork +34%; cheese +14%; bakery products +14%; and potatoes +30%. Conversely, proteins exhibiting deflationary trends included a -19% y/y decline in ground beef and a -63% y/y fall-off in chicken wings.

Notably, wing deflation reflects the result of a huge price spike (up +180% in April 2021) which prompted many restaurants to either remove them from the menu or swap them for boneless wings which are made from chicken breast meat. A relief in beef prices may also reflect the same dynamics as wings, with restaurants & consumers de-emphasizing this protein after it spiked to a +63% y/y increase in September 2021. Also, cattle ranchers apparently brought more heads to the market at a time when prices & drought levels were high, increasing supply (and beef prices) in the short term at the expense of future supply levels.

The important question is: why did commodity costs escalate to such high levels, to begin with? It’s not like people are eating more, driving demand higher… Rather, it seems that input cost inflation (energy, fertilizer, freight & warehousing) is aggravating modest harvests that are stressed by droughts and plagues like the Avian Flu which led to the slaughter of an untold number of chickens & turkeys.   

Fortunately, restaurants & consumers struggling with rampant commodity inflation can manage their cost structures to some extent by changing their product mix (substituting one protein for another). Hopefully, this can buy us some time while the country figures out how to ramp-up supply for some badly needed eats.

Food Cost Inflation Graph
Food Cost Inflation Graph
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