The media love to talk about rising prices on food, and other staples of an average American's everyday life. The thought of a staple rising by 5 cents can send everyone into a tizzy, proclaiming the death of the middle class, a new recession or the rise of a new economy where there is a premium placed on everything due to rising rice, grain or gas prices. When you break down the numbers, however, the American middle class just seems to have its priorities backwards. TUTORIAL: All About Inflation
When food prices rise, they mostly affect poorer countries and families that spend a larger percentage of their yearly income on food. The cost of food, compared to what an average American individual or family spends during a year, is a sizable chunk, but it's certainly less so than media outlets might have you believe - and definitely far less than the 60-80% that families in developing nations spend yearly on food. In developing countries, rising food prices are certainly pushing people further into poverty and despair, but in the developed world, rising food prices are much less of an issue than you'd think from reading the news. (You may have heard of this method of evaluating currencies, but make sure you know the whole story. Check out The Big Mac Index: Food For Thought.)
Why Food Costs Are Rising
The reasons for rising food prices are varied and wide-reaching. One of the reasons for the most recent rises in food prices has to do with the developed world's move to biofuels, which has increased the price of corn, a staple that provides feed for animals and is used as an additive to an amazing amount of everyday products. Rising food costs are also the consequence of a growing middle class and growing wealth in two huge developing nations: India and China. As well, there have been a series of serious weather events, like the heavy rains in Canadian Prairies and cool, damp weather across the American Midwest this past year, which sent wheat prices up 74% on the Chicago Board of Trade. According to MSNBC, a drought that's threatening China's wheat-growing areas, which are the world's largest, threaten to push food prices up even higher.
How Much Are Costs Rising?
Throughout the developing world, food prices are rising at an alarming rate, but this rate is not reflected in American prices. Though food prices did hit a global peak this past January, according to the Food and Agriculture Organization of the United Nations (a level that surpasses the previous high that was recorded in 2008) it's about 8% higher for the world. However, in the U.S., food prices at the supermarket went up just 1.5% and are only expected to increase 2% in 2011.
What It Means for the Average American: Not Much
According to the Bureau of Labor Statistics, the average American is spending about 10% of their annual income on total food spending, and about 60% of that on groceries and 40% on eating away from home. So, even if food prices are expected to rise by 2%, when the average American is spending $6,372 per year on food, in total, you're looking at a cost rise of $127.44, or just over $10 per month, or 34 cents per day. It's a negligible amount for the national average, yet it still seems to cause a lot of panic and attention-grabbing news headlines. This is most likely because of the way Americans spend money; Americans spend nearly double the amount on transportation than they do on eating at home, and entertainment spending is just 30% less than the cost of buying groceries.
When it comes down to it, Americans will not be affected much by rising food prices, despite what fear-mongering media outlets will have you believe. To illustrate, the average movie ticket price was around $7.5 in 2009; if movie prices went up $1 to $8.50, an increase of 13%, it would probably have a more substantial effect on the American budget than cheese increasing in cost by 2%.
Illustrating the Price of Food
Next time you're getting yourself a sandwich for lunch from a sandwich counter or restaurant, imagine the costs and work that go into getting that sandwich made for you for $5. The vegetables are grown hundreds of miles away, they're then transported, washed and cut up, ready to be used; the grain for the breads is grown by farmers, transported by truckers, mixed with other ingredients in industrial factories, baked, packaged and sent to a restaurant; the meat was an animal that had been raised for months by farm workers, transported to a factory, slaughtered, processed and packaged and sent to a distributor, who then sends it to the sandwich business; the cheese was milk that was processed by dairy workers, sent to a factory to be made into cheese, packaged and then shipped. As well, there is someone right in front of you - or in the back of the restaurant - making you this sandwich, and earning an hourly wage like everyone involved in the process; and for this luxury, you pay $5. (Learn the underlying theories behind these concepts and what they can mean for your portfolio. See The Importance Of Inflation And GDP.)
With the BLS report putting the average hourly pay rate of a private industry working American at $22.87, you're working roughly 13 minutes for this sandwich. Even if prices go up 5%, you're still working about 14 minutes to buy that sandwich, and it costs substantially less to buy the groceries at the store and make it yourself.
The Bottom Line
When thinking about rising food prices, hopefully the points presented will put these prices into perspective, and will allow you to stay calm when a bold headline proclaims that food prices will increase by 5%. Though the food prices can have serious damage on developing nations, they don't really mean much, at this point, for the average American family or individual - especially when you consider where Americans are really spending their paychecks, and what they're getting for them.