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As food prices plummet, consumers rejoice, farmers lament

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When consumers shop at their local grocery stores these days, bargains can be had in practically every aisle. That’s because bountiful harvests and cheap energy have pushed prices of many commodities including beef, chicken, corn and soybeans to recent lows.

The U.S. Department of Agriculture is forecasting that supermarket prices, also known as “food at home,” will end the year with a decline of 0.5 percent to a gain of 0.5 percent, well below the 20-year historical average of a 2.5 percent increase. The department expects prices next year to rise between 1 percent and 2 percent. 

And while farmers aren’t too happy about it, consumers are eagerly reaping the benefits, though the bonanza is limited because commodity costs don’t account for a large percentage of most packaged food.

“Every time they go to the grocery store, they wind up paying a little less,” said Ryan Sweet, an economist at Moody’s Analytics. “It’s somewhat encouraging for consumers, but it’s not going to have an enormous effect on discretionary spending.”

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According to a recent survey by the American Farm Bureau, the total cost of 16 food items that can be used to prepare one or more meals has fallen 8 percent to $49.70 compared with a year ago. Retail prices for 13 of the products declined. A dozen eggs fell 51 percent to $1.48. Chicken breast dropped 16 percent to $2.86 per pound, while sirloin tip roast slipped 11 percent to $5.05 per pound. Bagged salad, apples and potatoes recorded gains.

Restaurant prices, however, are on the rise because of other expenses, such as labor and rental costs.

“For all commodities in agriculture there is a lot of product on hand, and prices are depressed,” said John Newton, the Farm Bureau’s director of market intelligence, in a statement. He added that as retail grocery prices have risen over time, the share of the food dollar that farmers and ranchers have received has fallen. 

“Through the mid-1970s, farmers received about one-third of consumer retail food expenditures for food eaten at home and away from home, on average,” Newton said. “Since then, that figure has decreased steadily and is now about 17 percent.”

As Newton implied, farmers are feeling a pinch. The USDA recently announced plans to spend $20 million to purchase excess cheese to reduce the U.S. cheese surplus that’s at a 30-year high. Lawmakers in New Hampshire are preparing a financial aid package for the state’s dairy industry, which has lost 19 of its 120 operations in less than a year.

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Overall, net farm income is expected to hit its lowest level since 2009, while farm real estate debt is at its highest since the 1980s, according to the Des Moines Register.

“It’s put farmers under stress,” said Chad Hart, an associate professor of economics at Iowa State University. “They’re searching for ways to lower their cost structure and work with these lower commodity prices.”

Farmers are tightening their belts by spending less on seeds and chemicals, which has contributed to a rash of mergers in the sector, such as Bayer’s (BAYRY) planned $57 billion acquisition of Monsanto (MON), which produces 2,000 different varieties of seeds including genetically modified organisms. Farm equipment sales have also faltered, and Deere (DE) expects them to plunge in North America from 15 percent to 20 percent this year.

Eventually, the forces of supply and demand will balance themselves -- though probably not soon enough for anyone who makes a living on a farm and too soon for consumers in grocery stores.

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