Food must benefit from soaring income

by Morton Sosland
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While it might seem the height of economic realism to believe the collapse in global oil prices during the past five months is highly positive for everyone who doesn’t produce oil and that this is overwhelmingly the case for the food industry, the actual market has not played out that way. Hardly anything could be more contrary to such expectations of the way the drop in oil markets, and thus in gasoline prices, should equate to a dramatic increase in consumer incomes available for spending on food than how a centerpiece of the food industry like McDonald’s experienced a 4.6% reduction in monthly sales. McDonald’s attributed the fall to “strong competitive activity,” but that does little to explain why all that additional money going to consumers did not flow into expanding these sales. Nearly the same could be asked about the showing of a number of other food manufacturers and retailers.

In many ways, the oil price collapse and the millions of dollars it has added to the income of consumers pose a test for the food industry. For many years, cautious consumer spending was attributed to the rising cost of motor fuel and other energy sources. These have been cited as explaining why food industry volumes have proved disappointing. Indeed, it was not long ago that this factor had a central role for food executives seeking to explain budgetary and promotion-related shortfalls. That this negative has been erased by falls in oil to the lowest levels in more than five years suddenly puts a dramatic challenge to the food industry to show it knows how to capitalize on the disappearance of this nemesis.

Considering how significant the drop in the price of oil has been, and the number of forecasts pointing to this as a windfall for manufacturers and consumers, any thoughts of such a downturn being other than a great blessing have been put aside. The early temptation was to express concern about what a precipitous decline could mean to the economies of countries like Russia that depend on oil revenues. These concerns have been abandoned, leaving slow growth in China as the major global economic worry.

When it comes to assessing the likely impact of a price change that central bankers say may add as much as a percentage point to gross domestic product in developed countries, little exists in the way of past performance. The unprecedented declines lead one to wonder about the reality of past studies by the U.S. Department of Agriculture aiming to measure how income and price changes might affect American consumer demand. Existing theoretical studies of income elasticities of demand forecast how a 1% increase in per capita income may affect the quantities demanded by consumers of a whole range of food. That income gain is equated with increases of 0.392% for beef, 0.659% for pork, 0.077% for chicken, 0.131% for wheat flour, 0.918% for tomatoes and 0.818% for coffee and tea.

In total, the U.S.D.A.’s system includes forecasts like these for 1,640 estimated demand elasticities covering 39 broad food categories. It is apparent that the oil-driven consumer income increases are going to serve as a test of how such specific analysis works. The outcome will be interesting, but it leaves the major question unanswered — the degree to which what has happened to oil prices and its primary effect of putting more cash into the pockets of consumers may be translated into expanded food purchases when encouraged at the same time by a food industry fully aware of the tremendous positive that has been unleashed. Seeing U.S.D.A. forecasts showing that 1% gains in income fall short of prompting anything like equal increases in consumer demand, the food industry now must take up the challenge posed by current unprecedented price and income moves to find the path making it reasonable to look for consumption pickups matching the amazing income rise.

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