Food Deflation Driving "Least Profitable Year In 20 Years" As Farmers And Grocers Get Crushed

Sinking food prices, while good for the consumer, is devastating for almost everyone else in the supply chain from the farmer all the way to the grocers.  Farmers suffer as their key input cost, labor, is actually increasing in many states from the rash of minimum wage hikes around the country while fuel seems to move wildly with any number of daily rumors about production freezes in the middle east.  Meanwhile, grocers suffer as already thin margins get compressed even further as existing inventories get marked down. 

Food prices have come under extreme pressure in 2016 due primarily to lower Chinese consumption resulting from a weak Chinese economy and a strong U.S. dollar.  This slack in demand has resulted in massive supply gluts for several commodities as producers failed to adjust supply quickly enough to meet new levels of demand.  In fact, the USDA recently provided a $20mm "bailout" to cheese producers and reports have surfaced that milk producers have been dumping excess milk on fields. 

With the base inputs of corn, wheat and soybeans all tanking, food deflation has been pervasive with almost every commodity down substantially YoY. 

Proteins, which represent nearly 20% of the typical consumer's shopping basket, are trending flat to down 8% so far in 2016.

Food Inflation - Proteins


Dairy and grains are down mid-single digits YoY while egg prices have crashed as suppliers added tons of excess egg-laying capacity in response to last year's price spike related to the avian flu outbreak in the Midwest.

Food Inflation


Fresh fruit and vegetable prices have held up better presumably because consumption is less dependent on the export market.

Food Inflation


Meanwhile, alcohol prices continue to be the most stable of pretty much any item in the typical shopper's basket.

Food Inflation


Farmers are among the hardest hit when food prices decline.  In fact, we recently wrote about how sinking ag commodity prices in the Midwest were resulting in substantial declines in ag land prices and farmer incomes which then translate into an increase in farmer credit defaults (see "Farmland Bubble Bursts As Ag Credit Conditions Crumble").  Within that post we noted that farmland prices in Chicago's 7th District (IL, IN, IA, MI, WI) declined in 2014 and 2015 after only dropping in 4 other years since 1965.

7th District


As the Wall Street Journal pointed out, farmers have been forced to dump "millions of pounds of excess milk on to fields" while the USDA provided a $20mm "bailout" to cheese producers. 

The glut is so severe in some places that dairy farmers have been dumping millions of pounds of excess milk onto fields. The U.S. Department of Agriculture just bought $20 million worth of cheese in response to hard-hit dairy farmers’ requests. The cheese was given to food banks and others through USDA nutrition-assistance programs.


Ben Moore, a sixth-generation farmer who grows corn and soybeans on some 5,000 acres in Indiana and Ohio, said 2016 is shaping up to be his least profitable year in 20 years. Facing weak crop prices, he is making do with his current tractors and combines rather than upgrading his equipment, and is pushing for lower prices on pesticides, seeds and fertilizer.


On Monday, corn futures, which peaked in 2012 at more than $8 a bushel, closed at $3.11 ¾ a bushel, a seven-year low, on the Chicago Board of Trade.


“We cannot withstand $4 a bushel corn,” Mr. Moore said.


Farmers who had built a nest egg after a robust period earlier this decade now have exhausted those reserves, said Karl Setzer, a market analyst for MaxYield Cooperative, a West Bend, Iowa, grain marketer. “The guys that are heavily leveraged and those who don’t have a plan of action will suffer for a while.”

But farmers aren't the only ones to suffer during a deflationary food environment.  Grocers also suffer as tiny margins get compressed even further as existing inventories get marked down to prevailing market prices.

Falling costs are taking a toll on many food retailers. Grocery stores already have thin profit margins and deflation tends to reduce the value of their inventory. To stay competitive, they must cut prices on existing goods before lower-priced staples land on the loading dock, and have fewer opportunities to raise prices.


At least six national food retailers, including Costco Wholesale Corp. and Whole Foods Market Inc., and four of the five largest publicly traded food distributors, including Sysco Corp. and US Foods Holding Corp., have reported that their margins suffered in the last quarter because of food deflation, the first time analysts can recall so many grocers singling out deflation as a big problem.


“Deflation is kind of the elephant in the room,” Dennis Eidson, chief executive of SpartanNash Co., which operates 160 grocery stores from Colorado to Ohio and distributes food to 1,900 retailers across the country, told investors this month.

Meanwhile, consumers are the key beneficiaries of food price deflation.

With weak U.S. consumers shunning eating out more and more over the past year....



The combination of stagnant real earnings and lower retail food prices have provided the necessary incentives to drive the highest QoQ increase in real consumption of "food for home consumption" since the 80s.

Food Basket


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