Food at center of global economic shock

by Morton Sosland
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Even after months of food prices registering advances over a year earlier, it is steep to measure the impact these unprecedented prices are having on consumption. As is the case with crude oil, where fuel prices in record-setting territory might be expected to reduce demand, the performance of individual foods does not conform with broad expectations of the impact from soaring markets. Without data that relate price levels to demand specifics, the food industry must rely on what seems common sense. The latter says the price moves of the past year will definitely change food consumption patterns, and that in many instances these shifts may reverse trends that had been under way for half a century or longer.

While the food industry is naturally tempted to focus on how retail price moves will affect consumer buying patterns, the complexity of the current situation is magnified by the way that personal wealth and incomes also are being affected by swings in the over all economy.

Rising food prices would be expected to prompt shifts in sales and consumption patterns on their own, but when the most dramatic food price inflation in memory is combined with income and wealth cutbacks, the likely repercussions are without precedent. According to preliminary Federal Reserve calculations, total U.S. household wealth started falling dramatically in the last quarter of 2007 when both equity markets and housing prices headed lower. It is fears about how this wealth decline will affect consumer spending that prompted the president and the Congress to provide income help through tax rebates. As Americans become less wealthy, or poorer, threats to the economy magnify. Just how this turmoil will play out in the food marketplace is one of the toughest questions facing food manufacturers.

Without trying to guess how demand for individual foods will be affected, it is likely that measures of food spending are already shifting. One that has been a source of pride for the food industry shows Americans spending the least on food of any country. The most recent data showed Americans spend 7.4% of their personal consumption expenditures for food to be eaten at home, compared with 11.2% in the United Kingdom and more than 50% in less developed countries. While high incomes account for this achievement, the efficiencies of agriculture and food processing and distribution also may be credited.

It was only at the start of the 21st century that the share of U.S. disposable income spent on food, both at home and away from home, dipped below 10%, to 9.9% in the latest Economic Research Service estimate. In the final three decades of the 20th century, per capita income in America increased 48%, while food spending per capita in the same period rose 23%. The latter increase mainly resulted from the shift to away-from-home eating. As incomes have risen, the share spent on food not just declines but also trends toward consumption away from the home. Economists are concerned whether lower wealth may sharply reverse of these trends.

The share of income being spent on food is often cited as a measure of affluence. At the same time, a sharp increase in this measure, as seems in the making, is being cited as a possible cause of civic and political unrest. More than 2.5 billion people in Asia depend on cheap and abundant supplies of rice for food, and the recent dramatic climb in prices prompted a highly regarded observer to say, "If history is any indicator, we should be worried because rice shortages have in the past led to civil unrest." Much more is at stake in the current difficult price and supplydemand environment for all foods in almost every corner of the world than unit sales trends. It poses a situation that requires not just analysis on the part of the food industry, but clearheaded insights by governments everywhere.

This article can also be found in the digital edition of Food Business News, June 10, 2008, starting on Page 9. Click
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