Whatever Happened to Predictability? Reflections from the USDA Outlook Forum

By Stable Insights Team (May 2, 2023) -- Reprinted from our sister publication, Unconventional Ag News.

Although experts see signs of an improving economy, the ability to forecast and set expectations is becoming harder to predict for a number of reasons: climate change is intensifying weather activity; consumer behaviors have fundamentally changed since the coronavirus pandemic; and commodity prices, although improving, remain elevated after a year of significant inflation and operational setbacks.

In opening remarks at the U.S. Department of Agriculture’s recent outlook forum, Seth Meyer, USDA’s chief economist, said there was a sense of optimism around 2023, but also plenty of uncertainty. Positive signals indicate a safe, soft landing after the tumultuous year prior, but uncertainty is high as inflationary pressures persist and interest rates rise. He said livestock and crop prices remain strong, but not all commodities are faring equally well. “There are risks,” said Meyer.

There are unknowns surrounding the implications of the drought on cattle supplies and winter wheat, producer input costs, the future trajectory of highly pathogenic avian influenza cases, the possibility of unusual weather disrupting crop production, and the ongoing war in Ukraine, to name a few.

Nothing is certain as they say. Food companies are exposed and susceptible to unexpected agricultural and financial risk.

Here are the four takeaways from the USDA Forum worth keeping an eye on:

1. Expect food prices to remain high, increase at a slower rate than last year

Food prices have seen sizable increases in recent years. Last year, food prices grew faster than the all-items Consumer Price Index and all other major consumption categories except transportation.

Historically, prices tend to grow slower at the grocery stores compared to restaurants, but in the aftermath of COVID-19, they shot up at similar rates. In fact, none of the grocery categories decreased last year, according to U.S. Bureau of Labor Statistics data. All grocery, or food-at-home categories, increased by at least 5 percent over a 12-month period. Poultry rose by 15 percent due in part to supply challenges linked to the worst avian influenza outbreak on record. Eggs surpassed 30 percent growth.

Matthew MacLachlan, a research economist in the Food Markets branch of the Food Economics Division at USDA’s Economic Research Service, forecast about 8 percent growth in food prices for grocery and restaurant categories in 2023, lower than the previous year, but well above historical norms.

2. Survey: Consumers say inflation is worse than it really is

Americans continue to face higher prices for all consumer goods, from electricity and gasoline to grocery and restaurant food purchases.

Despite challenges, Andrew Harig, vice president of Tax, Trade, Sustainability and Policy Development at the Food Marketing Institute, said that innovations and efficiencies have helped to keep the cost of food relatively flat over the past 20 years. Adjusted for inflation, he said the price of food staples, such as white rice, chicken, and cheddar cheese, are actually lower compared to 1992.

In short, Harig argued that consumers have an exaggerated view of inflation. According to a recent survey conducted by the Food Marketing Institute, participants said prices were up more than 24 percent over the previous year, compared to an actual 12 percent.

3. Consumer behaviors are changing as prices increase

To get the most out of their dollars, consumers are being strategic when they shop. According to a recent poll from the Food Marketing Institute, 59 percent of respondents said they were searching for more deals and 45 percent were buying more store brands. About 32 percent only bought items that were on sale. The online poll, which fielded more than 1,300 U.S. adults in February 2023, reported that 41 percent of respondents said they were buying fewer items in response to the higher prices.

In the pre-COVID era, consumers on average spent close to $120 per week, according to Food Marketing Institute data. That number spiked to $161 in the wake of COVID when shoppers were stockpiling food and everyday items. It has since leveled out to $151 per week, but the sentiment among shoppers is that they are paying more for less.

4. Climate change is affecting weather patterns, driving uncertainty A common story in the West has been the severity of drought and its impact on pasture, livestock, and farm yields, affecting supply and demand dynamics. Alfalfa hay, used to feed beef and dairy cattle, is grown in the area and was significantly affected by the prolonged dry climate during the last three years or so. Part of what is driving sharp weather events, like this one, is climate change, experts say. Charles Luce, a research hydrologist at USDA, said increased temperatures over time are doing a few things to make it more difficult to predict weather outcomes. They are driving the potential for increased evapotranspiration, a term used to explain the process of how water moves from the earth’s surface into the atmosphere, or a combination of evaporation and transpiration. Luce said with more dry days, the atmosphere can hold more water. "One way to look at that is the atmosphere is hungrier for water,” he said. “That’s increasing with climate change as things get warmer, it’s this nonlinear relationship.” If it’s soaking up more water like a sponge, the atmosphere also can release more water, resulting in more rainfall. Looking ahead, Luce said this behavior will lead to more intense but fewer storms and dry spells.

“The good years are as good as ever, but the bad years are getting worse and in the between years there is a lot less certainty,” he said. This article first appeared on Stable Insights where you can learn more about the impact from the cycle of volatility in commodity markets, and how businesses like yours are looking to solve this challenge. To learn more about the Case for Reining in Commodity Price Risk, read the ebook today.