Tuesday, September 06, 2016

The falling food price fallacy

There is a story starting to circulate in the mainstream media on falling food prices in the US.  This is at best a bit of lazy journalism or state sponsored propoganda at worst.

As the story goes, farm staples - eggs and milk - are tumbling in price so consumers are able to save massive amounts off their monthly bills (though you'd have to eat a LOT of eggs for that to be the case).

Last night CBS ran this story which sounds great on the surface -

"American shoppers are enjoying what could be the longest streak of falling food prices in a half century. That’s good, if you’re buying a shopping cart full of groceries, but it’s not so good for farmers.  Heather Buen said putting food on the table has gotten easier.
“I would say I can save anywhere from about $25 to $50 sometimes on my grocery bills in comparison to last year,” she said. 

The average price of a dozen eggs has dropped from $2.57 last year to a $1.54, down nearly 40 percent. A gallon of milk is about 40 cents cheaper..."

Okay, so let's look at this and separate fact from fiction.  Yes, egg prices are collapsing (I'll get to that in a minute) and milk and beef prices are down slightly, however, if you ask anyone that shops on a regular basis they can identify 10 items that have risen in price over the past year for every 1 item that has fallen.  All fruits and vegetables are up 20-30% from last year and most processed foods are up 5-10%.  The idea that grocery bills are shrinking is insulting to anyone that has to put food on the table for a family.

Eggs - I mentioned this recently to my Mom because I purchase a lot of eggs and it's a commodity much like corn, orange juice concentrate or even oil - you know what the market pays.  If you remember last summer there was a large outbreak of Avian flu in the Midwest.  This lead to a huge reduction in the number of laying hens as flocks were culled (at least 50 million by some estimates).  This caused prices of eggs to spike wildly last year and I paid a peak price of $2.24/dozen last year at the height of the bird flu. 

Well, fast-forward a year and all of those birds have been replaced and probably a few more.  Apparently, new chickens lay more eggs than older chickens (side note: in the era before incubators new chickens were born in the spring and commanded a higher price b/c they laid more eggs but some sellers would try to pass off older chickens as new chickens to increase their profits.  Thus, the origin of the phrase "that's no Spring chicken"). 

If you replace 50,000,000 chickens in the US at one time and you will create an egg glut the following year.  Last week I paid $0.78/ dozen of eggs at retail as a result of this glut.

There is one other potential cause of this glut - the Federal Reserve. One of the side-effects of the Federal Reserve's war on interest rates is that it encourages more borrowing at ultra low rates.  Maybe instead of adding 25,000 chickens to replace the birds you lost, you borrow money and add another 2 barns and add 150,000 chickens.  If you make that decision in a vacuum you might be okay, but if you make that decision along with 500 other egg farmers in the US who all make the same decision at the same time, well, now you have a glut. 

Last year when egg prices were soaring the story was "well, that's not inflation because it's a one time event".  Now when prices are falling, again most likely because of a one-time replacement of chickens, the media wants us to buy that it's great for consumers even if their $1.46 in savings are eaten up by higher hummus, black bean, apple or lettuce prices.

The more you know....

**** I have about 30 stories queued up ready to roll on the state of our economy, but I'll try to cover a few topics in each post so I don't flood your inbox.

Quick summary - I'm not sure I'd want to be running for President because I believe by the time Q4 2016 or Q1 2017 rolls around we may be in a recession.


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