The price of food

"Cheap food will starve you to death."

That was a phrase I heard my former employer, U.S Representative Jim Weaver, a member of the Agriculture Committee, say about food prices. He said it to farmers. If farmers cannot make a living growing food they will stop doing it. 

I stopped growing melons, even for fun in retirement. There is no money in selling vine-ripe, hand-picked melons on a small farm. Factory farms are too big and too efficient a competitor. The price of unprocessed food -- what I call real food -- is too cheap. My observation is that the margin comes in converting commodity food into something more convenient for the consumer, i.e. coleslaw salad dressing, not cabbage. I wasn't in a position to create a value-added branded product. Most Americans are cheering for cheap food, of course. They are buyers. I liked higher prices. I was selling. 

Chip O'Hare is an expert on food price inflation. He was a college classmate. He owned and operated the Johnson O'Hare Company, a regional sales and marketing company which covers from Boston to Minneapolis and south to Richmond, VA. It is part of a national cooperative that covers the U.S. and has sales of over $10 billion. Seen here with his wife, Bobbie, high above Marseilles, on a recent trip.

Guest Post by Chip O'Hare 

Peter asked me about food inflation. My wife and I are presently in France and headed for Spain. In our brief trip so far, I’ve noticed that the price of food in Europe is very high, with restaurant pricing much higher than the U.S. regardless of the degree of fanciness of establishment. Supermarket prices are also higher than in the US. 

I've sold food for almost 50 years. I was in a family food brokerage company (JOH Sales and Marketing) that represents hundreds of processors and thousands of brands. Today JOH represents products like K-Cups, Dole Salad, Marie's salad dressing, Berio Olive Oil, Solo cups, Nature Made Vitamins and Bumble Bee tuna. Food brokers handle about 75% of products sold in the supermarket industry today.

The food industry is huge and relatively misunderstood by the American people. Every day, people go to their local supermarket and buy their favorite foods, with huge selections, without having the slightest understanding of how the food ends up in their shopping basket. The scale of the industry is huge and the capital deployed by industry is incredible as growers, processors, consumer products companies and retailers compete for our stomachs.The U.S. has the most efficient food distribution system in the world. That’s why we spend the lowest percentage of disposable income on food at home with the U.S. at 6.4%, Europe closer to 10%, and developing countries 30-50%. Our food distribution system chugged along at equilibrium with modest inflation until the Covid disruption, when all hell broke loose. Supply chains were ruptured due to production, raw material, and freight issues, some of which continue today. Prior to Covid, manufacturers had significant difficulty pushing price increases through. Once Covid hit, price increases became easier as the world recognized that costs at all levels were exploding.

While we see inflation moderating somewhat (food inflation was easily 10+% from our perspective in '20, '21 and '22) we are still experiencing price increases from manufacturers and processors. Inflation is an upward spiral and stubborn, as labor increases seek to keep up with inflation while driving it up in the process. So the cost of labor continues to be the driver of this upward movement as we exit the Covid-driven imbalances that began in 2020, when many workers stopped working and the government stepped in to support workers in need.

As an example, at the low end of workers, those who earned $13-15 per hour, jobs went unfilled at a huge scale. At my company we have folks who worked at the store level checking on our products. We have approximately 200 of these workers who were making about $14 per hour pre-Covid. Many stopped working during Covid, which we understood due to the danger of hanging around a supermarket all day. Today we pay them over $20 per hour and in some expensive markets like New York City, we pay $22 and we still have difficulty filling these jobs. It is obvious to us that many folks stopped working during the pandemic and with government assistance chose to stay out or work for an extended period of time. Other companies have experienced the same phenomena and have had to bid up wages to attract workers. While this has been a very good thing for workers, it remains the fundamental driver of inflation in our industry. Essentially there has been a significant reset of wages in the US economy at all levels. We are also experiencing upward wage pressure for executive positions as well.

I expect that things will return to equilibrium over the next few years, but it will be gradual, with inflation subsiding incrementally. Retailers are beginning to push back on price increases, and downward pressure from lower demand has kicked in as well. Sticker shock at store level has been significant. So the invisible hand is working and the markets will stabilize, but it will be at least another year or two before they do. The inflation genie has been out of the bottle and hates to climb back into it!

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