Every food category, whether it be meat, produce, bread, or dairy, has faced inflationary pressures recently. According to data from the U.S. Bureau of Labor Statistics, the consumer price index for food-at-home experienced its largest 12-month increase in over 40 years. Factors contributing to this rise include supply chain disruptions, labor shortages, and escalating fuel and transportation costs. Additionally, extreme weather has resulted in shortages of key crops, ranging from durum wheat to citrus. The ongoing conflict in Ukraine has further devastated regional food supply chains, leading major consumer packaged goods (CPG) companies to pause operations and investments, while causing significant price spikes in global commodities like wheat and soybeans. Despite this tumultuous situation, Michael Swanson, the chief agricultural economist at Wells Fargo, believes that many—but not all—of these issues will stabilize in the coming months. Recently, Swanson shared his insights on the current state of inflation, its primary drivers, and “the biggest mistake” food CPGs could make while navigating market volatility.
SWANSON: A few key points come to mind that differ from common perceptions. First, looking at current inflation, we see food-at-home prices rising by 8.7% year-over-year, marking a multidecade high. This surge isn’t due to a shortage of ingredients—though that may be hard for some to believe. The price hikes we are witnessing today stemmed from negotiations that took place in November, December, and January between food manufacturers and retailers. The increases reflect the labor, transportation, and packaging costs being passed along. Thus, food shortages or scarcity haven’t been the driving forces behind this inflation; rather, it represents the transformation of our abundant resources into consumable products.
SWANSON: Absolutely, protein has been a significant contributor to food inflation, especially during the 2020 COVID spike and the current surge. When discussing protein, it’s primarily about converting corn, soybean meal, and other feed grains into livestock. Given the current feed prices, livestock producers are experiencing another wave of inflation. Higher grain prices multiply through the protein production process, leading us to anticipate that meat, poultry, and dairy sectors will compress their margins and pass on increased costs, as they cannot operate without the elevated prices of corn and soybeans.
SWANSON: It’s also important to clarify some misconceptions. The United States has always been a wheat exporter, not an importer, which means we’re not shielded from global market fluctuations. If a grain operator can sell wheat at a higher price abroad, they will, forcing the domestic market to align. The recent spike in wheat prices is largely due to anticipated shortages from Ukraine and Russia, not from a domestic deficit—our wheat production remains robust. Furthermore, the U.S. produces high-quality wheat, which is highly sought after by wealthier nations, driving up flour prices. Higher flour costs lead to increased prices for bread, chips, crackers, and pasta, making it impossible to escape the impact of global trade issues.
SWANSON: To provide some context, Ukraine and Russia together account for 2.4% of the global population and 3.6% of agricultural production. They represent about 14.6% of global wheat production—11.3% from Russia and 3.3% from Ukraine—making them pivotal players in the wheat market. While Russia contributes to the corn market, it should not dictate prices. Notably, Ukraine handles 80% of the world’s sunflower oil trade, but sunflower oil comprises only 3% of the total edible oil market, indicating that their influence is limited compared to major players like Malaysia in palm oil.
SWANSON: Surprisingly, we currently have more truck drivers and food manufacturing workers than ever before. Recent conversations with producers indicate that while they would like to recruit additional skilled workers, they have moved past the critical labor shortages experienced last year. This suggests that as staffing stabilizes and wage pressures begin to ease, companies may not need to continually raise salaries. While ingredient costs will still pose challenges, the recovery in manufacturing and trucking will alleviate some of the major constraints driving food inflation.
SWANSON: With regard to past disruptions, like last year’s freeze in Texas that affected packaging and the petrochemical sector, the likelihood of such events recurring appears low this year. Container traffic delays are reportedly decreasing, and while container prices remain high, they could drop significantly. As we address these supply chain issues, it will be beneficial since they were fundamental to the initial wave of inflation. If these issues do not persist, companies will be better positioned to manage ingredient costs more effectively.
SWANSON: The adage about “not changing horses midstream to avoid getting wet” is particularly relevant in today’s environment. Many CPGs are reassessing their hedging strategies in response to market volatility and rising costs. Ideally, they were “hedging to budget” prior to the price surges, which would allow them to benefit from that protection. The major misstep would be to shift their hedging and risk management strategies to “swing for the fences,” assuming they can predict future fluctuations. The unpredictability of the market is a reality that many fail to acknowledge. The focus should be on ensuring their hedges fulfill their intended purpose without veering into speculation.
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