Commodity Inflation, Food Prices and Marketing Margins

Project: Research project

Description

Commodity prices have been rising at unprecedented rates over the last two years. In the last year alone, corn prices are up 51.9%, soybean prices 74.4%, wheat prices 104.5%, and milk prices by 41.4%, not to mention equally impressive increases in the prices of fuel, fertilizer and other raw products that enter the food production system. Although there has been considerable debate over the proximate cause - surging demand from China and India, droughts in key production areas, weakening U.S. dollar, higher energy costs, speculation on futures markets and increased demand for biofuels have all been cited - perhaps greater concern should be placed on the likely effect on consumers, particularly those oflimited means. While high grain, meat, milk and cotton prices have meant unusual prosperity in the farm sector, policymakers are not surprisingly concerned with the likely impact on food prices, and inflation more generally. Some have argue that because commodity prices form such a small part of food prices, the recent surge in commodity prices will have little impact on consumer prices. However, no two foods are made, distributed and sold in exactly the same way so such generalizations are impossible for the entire sector. Ultimately, the answer to this critical question is an empirical one. The primary objective of the proposed research is to determine the impact of commodity price inflation on food prices, consumer demand and marketing margins in three important food categories: fluid milk, fresh produce and ready-to-eat cereal. In completing this objective, the research will provide: estimates of retail demand elasticitie~ at the household level for products within the above categories using the Nielsen Homescan database; estimated pass-through rates (both mean and standard deviation, or the pass-through of volatility) and marketing margins between food suppliers and retailers, and between retailers and consumers; estimated deviations from competitive behavior (Bertrand Nash) for food suppliers and retailers, and the impact of commodity price inflation on estimated deviations (conduct); estimated differences in consumer demand elasticities and likely responses to food price inflation by demographic segment: race I ethnicity, region, income and education and occupational status of the household head; simulated effects of assumed commodity-price inflation rates on food price inflation at the retail level, and changes in consumption patterns that are likely to result. By achieving these objectives, the project will provide valuable input to the debate surrounding the impact of higher commodity prices on food price inflation, and the extent to which higher farm prices are likely to negatively effect the welfare of disadvantaged groups in the economy.
StatusFinished
Effective start/end date8/20/0810/31/10

Funding

  • USDA: Economic Research Service: $49,426.00

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Commodity prices
Food prices
Marketing margins
Inflation
Food marketing
Commodities
Food
Retailers
Milk
Household
Pass-through
Retail
Consumer demand
Farm
Suppliers
Deviation
Prosperity
Competitive behavior
Standard deviation
Demand elasticity