Food prices are dropping. Milk has fallen 11% over the past year, while eggs have dropped an average of 40%. On the surface this seems like good news. You can finally afford again the basic necessities of life that for so long had been taking an increasing chunk out of your income. Unfortunately, that’s only one side of the story. Falling food prices may be good for you, but it’s bad for farmers, grocery stores and many other institutions that drive our economy.
Food Prices, Farmers and the Fallout
It’s easy to see why a drop in food prices has a negative effect on farmers. Supply outweighs demand, so they can’t make as much money as they previously did. However, this dip in profits has a ripple effect that impacts other industries too.
Since farmers are making less money, they’re forced to decrease their spending. Deere & Co., the company that makes tractors and farm equipment, is also experiencing losses, as a result of these falling food prices. Other farmers are spending less on pesticides, seeds, fertilizer, and similar resources, which cuts into the profits of the industries that make each of those products as well.
And of course, food retailers are suffering too. Grocery stores always tend to have small margins, and as prices deflate their profits are dropping even further, to the point where it’s difficult for them to break even. With staples like milk, eggs, and beef becoming cheaper, more people are choosing to cook and eat at home rather than going to expensive restaurants. As a result, the food service industry is also experiencing setbacks.
Reasons for Dropping Prices
Why are food prices going down? As previously mentioned, the issue is supply and demand. Dairy, grain, meat, and other commodities are currently in abundance in this country. At the same time, other nations that we export a lot of that food to, such as China, are buying less of it. The U.S. dollar is getting stronger, so they can’t afford to buy as much from us anymore. Thus farmers are left with too much of everything and no way to get rid of it. Prices are slashed in response, and the food industry takes a beating.
The effect has been particularly pronounced in the dairy industry. Many farmers are dumping unused milk out in their fields. The U.S. Department of Agriculture recently made an effort to subsidize them by buying $20 million worth of cheese and donating it to food banks and nutrition assistance programs. But still the problem persists.
Another reasons food prices are dropping is because the price of oil is going down. Falling oil prices mean less money spent on fuel for tractors and other farm equipment, as well as the trucks that transport crops and food items from one place to another. This cuts transportation costs and allows food to be sold cheaper.
Unfortunately, as we’ve discussed before, the effects low oil prices have on the markets can be detrimental to our economy. Low food prices are reflective of the oil debt bomb that wreaked havoc on our economy a few years ago, and is poised to do so again in the near future.
Experts believe that food prices will continue to fall at least until the end of the year. And the effects will be felt throughout the nation. Your grocery bill may go down, but so will stocks. The already unstable economy will suffer even more and market volatility will increase.
These interrelated dynamics in our economy are something to keep in mind going forward. Enjoy the lower food prices while you can, but put those savings into a safe haven investment, where the ensuing market volatility won’t be able to impact them.