Food Manufacturing & The Economy

The past three years have been less than predictable, rife with change and uncertainty. Through the ups and downs, prices have seemed to see more up than down as of late. However, just as gas prices have begun to drop, it appears that food prices are beginning to drop as well. Why is that and what does it mean? Here are the cliff notes unpacking the relationship between food manufacturing and the current state of the economy.

How Food Manufacturing Supports the Economy

  • As explained in The economics of food production: “If increases in supply do not keep pace with growth in demand, food prices rise, attracting resources into food production. If supply grows faster, food prices and farm incomes fall, driving resources out of agriculture.”
  • The Economic Research Service of the U.S. Department of Agriculture details the importance of the U.S. agriculture sector, which extends beyond the farm business, by the numbers:
    • Americans’ expenditures on food amount to 12 percent of household budgets on average.
    • Agriculture, food, and related industries contributed $1.055 trillion to the U.S. gross domestic product (GDP) in 2020, a 5% share.
    • Expenditures on food accounted for 12.4 percent of U.S. households’ spending in 2021, an increase from 11.9 percent in 2020. The share of household expenditures on food ranked third behind housing (33.8 percent) and transportation (16.4 percent).
  • The sixth annual Feeding the Economy report found “Two years into the COVID-19 pandemic, the food and agriculture industries continue to add jobs, provide safe food, and feed the US economy in the face of global supply chain challenges and more. Together, these industries are responsible for roughly one-fifth of the country’s economic activity, directly supporting nearly 21.5 million jobs or more than 14% of U.S. employment,” and Farm Bureau summarized their findings, noting:
    • 7% of the nation’s economy and 29% of American jobs are linked to the food and agriculture sectors, either directly or indirectly.
    • Amidst the global supply chain and inflation crises, these sectors also exported $182.91 billion worth of goods, helping the U.S. maintain its position as a leading player in global agriculture.
    • “American agriculture is really the foundation of our lives and our economy,” said American Farm Bureau Federation Chief Economist Roger Cryan. “This study reveals the numbers, and maybe some of the spirit, of this one indispensable sector.”

How the Economy is Affecting Food Manufacturing

  • According to Restaurant Ware in July of 2022, “the U.S. Department of Agriculture has recorded the overall consumer price index of food prices being 10.1% higher than in May 2021,” and noted that everything is more expensive, including due to factors including COVID-19 and its after effects, labor difficulties, agriculture and severe weather, as well as government policies and conflicts.
  • S & P Global Commodity Insights further explains the effects of this global inflation on food manufacturers, indicating that “food manufacturers report smaller gross margins as rising input and operating costs outpace sales growth and price increases.” Moreover, while consumers are focusing on essentials when it comes to spending, thus creating strong food grocery sales, some are rethinking their essential spending, causing them to switch to cheaper alternatives in some cases. The result for food manufacturers is the challenge of “facing their own inflation challenges with higher input and operating costs. And cutbacks in consumer spending are limiting the ability for some companies to pass these costs on to consumers, hitting profit margins as a result.”
  • Summarizing “3 Ways Inflation is Impacting the Food and Beverage Industry,” Entrepreneur included changing consumer habits, higher operating costs and a pivot to beverages on its list. In regard to changing consumer habits, the publication noted that while many of the items food manufacturers sell are considered necessities, the soaring prices of staples like meat, eggs and bread are causing consumers to think twice about products and behaviors they may not have paused to think about before. Additionally, one solution the article cites that food and beverage businesses have used to address higher operating and manufacturing costs is to offer less product from the same price, otherwise known as “shrinkflation.” On the other hand, the opposite solution many have turned to is passing on the burden of increasing operating costs to the consumer. With neither solution being ideal, the challenge leaves businesses walking a tightrope.
  • Food Dive explains how “food and beverage manufacturers are facing higher input costs across their businesses” and notes how a “surge in freight, transportation and manufacturing costs as well as pandemic-related expenses also are weighing on producers.” The publication goes on to quote Phil Lempert, a food industry analyst and editor at SupermarketGuru.com regarding the unique combination of current pressures, “Before we might have seen price increases because of a certain raw material, or feed for animals, but we’ve never seen this perfect storm hit packaging, transportation, cost of goods, all of the above, while at the same time we have certain overarching issues that the industry is coping with like sustainability.”
  • Speaking of pandemic factors, Supply Chain Dive cites that consumer food prices in restaurants and grocery stores have risen 15% since the start of the pandemic and researched how food manufacturers felt about blaming supply chain for this inflation. In its research, Supply Chain Dive found that “many manufacturers are absorbing extraordinary amounts of costs even despite raising prices.” Speaking to the publication, Ben Ponder of Ponder Foods, a food manufacturer in Austin, Texas, stated, “You can’t raise prices as fast as costs are being raised. Raising prices is hard; it’s ugly. It results in tremendous backlash that is uncomfortable and unpleasant to deal with. It risks driving people away,” sharing that he believes food prices would be much higher is manufacturers didn’t fear backlash from customers. He went on to indicate that for his business the price increases are fundamentally due to labor and the publication further explained “suppliers lack the workforce necessary to produce at full capacity, extending shortages and lead times while driving up market prices. Finding and retaining factory workers before the pandemic was already a challenging task, but since the onset of COVID-19, it has become even more difficult. The resulting tightness in labor market has forced companies to pay higher wages to find the workers they need.”

What’s on the Horizon

  • Food Processing reported that the United Nations’ Food Price Index dropped for the eight straight month in November of 2022, reflecting the drops in the prices of grains, edible oils and other commodities. However, food inflation at the retail level hit an all-time high in October of 2022. The publication explained that according to experts, “lower commodity prices normally take three to six months to filter through to retail, and that uncertainty about supplies of grains and other necessities make it even harder to pass along lower prices.” Reflecting this trend, the CEO of Kroger was cited as saying that while he expects food inflation to fall, Kroger customers won’t see lower prices right away because while inflation is already starting to slow with fresh food prices, like meat and produce, with packaged foods some processors prefer raising prices rather than selling more units.
  • According to Fresh Plaza, while the average cost per grocery item in the USA decreased in November 2022, it’s still a lot more expensive to shop for groceries than it was the year prior as the cost per item has increased by 11.5% since then. The publication goes on to cite that “in conjunction with the reduction in cost per item, the average order value also decreased from $184 to $180, a 2.2 percent drop.”

While you may not be able to control everything when it comes to your food business (see inflation), you can control your business software. And, investing in efficient software that understands your business can save you time and mistakes – otherwise known as saving you money. Book a demo to see how NorthScope food ERP software can help give you the tools to build the business you’ve always wanted.