The rising price of food – how to find out if you’re being ripped off?

The rising cost of food has been all over the news in the past few months (e.g. in Finland here, here, here and here). In essence consumers are being told to expect much higher food prices next year. The news articles seem to focus on the fact that grain prices have risen to their all-time high, which they have. However, the reasons offered for this include both imaginary and real reasons.

The real reason(s)

The imaginary reasons include the oft-cited “fact” that crops have massively failed in many parts of the world this year. Incidentally this is a reason that people would easily accept as the cause of higher food prices. Only it’s not true – or at most only partially true; while there are always some crop failures in various places, consider this (via the Economist):

According to the International Grains Council, a trade body based in London, this year’s total cereals crop will be 1.66 billion tonnes, the largest on record and 89m tonnes more than last year’s harvest, another bumper crop.

All of a sudden it doesn’t sound like a particularly bad year in terms of production, now does it? While there are many factors that cause the rise in grain prices, the main culprit is increased demand, which in turn is caused by people in Asia eating more meat – and people people in Western countries wanting fuel for their cars. Using foodcrops for producing ethanol (and what’s more, the subsidies that go along with this) for fueling cars has by far a bigger impact than the occasional crop failures. Not only is it produced in the wrong countries where production isn’t optimal, it’s also incredibly wasteful: the grain needed to fill up an SUV once would feed a person for a year.

Impact to your grocery prices

Anyhow, now that we’ve established that the true cost of rising crop prices lays elsewhere than what’s often being told to us, it’s time to turn our attention to the everyday groceries. After all, it’s their price that we really care about. The grain prices have gone up as much as 100% over the past year or so, so for the sake of the argument, let’s say that the price of wheat for bread goes up by 100%.

Take this bread as an example here. It costs 2.68eur and weighs 384g – 6.99eur per kilogram. So to start figuring out what a 100% increase in the wheat price does to the bread price, we have to figure out how much the flour-portion of the bread costs to the store / bakery (many stores actually do some of their own baking which is nice).

By being extra-conservative, let’s say the price of the flour was half of what they sell it to consumers for at the same store, though in reality it’s likely to be a lot less. By using this measure, we come at 23 cents per kilogram for the price of the flour. Of a 2.68eur bread which contains 70% wheat flour, the price of the flour is roughly 6 cents – less than 3% of the total price.

Even this very rough analysis therefore produces results that are in line with the 3-5% that is generally accepted as the portion of wheat of the consumer price of bread. Now, if you double the price of wheat, you end up with an increase of 2.7% to the price of the bread – far less than the 20% that has been presented in the media as a certainty for next years’ bread price increase.

And this is bread – the one product where price of grain is likely to be most visible. For most other products, grain makes up an even smaller proportion of the total price, so we should expect even lower price hikes for them. Remember this when you find food prices rising by 10% or even more next year. Of course, other reasons for hiking the prices are also stated like increasing labor costs. However, in other fields the increasing labor costs are offset or more than offset by increasing productivity and it’s difficult to believe the food industry wouldn’t be enjoying from any of that.

And even if they wouldn’t, that’s not really the point – the point is that one cannot pin the blame of 10% or 20% more expensive bread on rising crop prices. Well okay, you can – but you’d be lying.

So do we just let them do that?

Emphasizing the wrong reasons for rising costs, de-emphasizing or completely forgetting to mention that raw material costs are only a tiny fraction of the price of the end product and publishing stories where consumers signal their willingness to submit to higher food prices is a strong and straightforward invitation for stores to raise prices more than what’d be warranted by the real price increases of ingredients. Of course the “analysis” above is very simplistic and carried out with imperfect information and the smallest possible sample, but it’s also a conservative calculation – and even at this level it’s still taking the thinking further than most people – and, indeed, newspapers – seem to be willing to do.

The question is, as with electricity price hikes, do we again just quietly let them raise the prices by much more than the costs have risen?