How Much and How Quick?
Pass-through of Commodity and Input
Cost Changes to U.S. Retail Food Prices
by
Ephraim Leibtag
Power Point Presentation for the
International Agricultural Trade Research Consortium
Analytic Symposium
“Confronting Food Price Inflation:
Implications for Agricultural Trade and Policies”
June 22-23, 2009
Seattle, Washington
How Much and How Quick?
Pass-through of Commodity and Input
Cost Changes to U.S. Retail Food Prices
Ephraim Leibtag, PhD
Food Markets Branch, Food Economics Division
ERS-USDA
Presented at the Confronting Food Price Inflation:
Implications for Agricultural
Trade and Policies Symposium
June 23, 2009
1
Food commodity prices down 22% from the 2008
peak, but still up 38% since January 2006
Source: International Monetary Fund: International Financial Statistics
77% increase
at peak
150
Food commodity price index
100
2005 Index = 100
1
1
1
1
1
1
1
1
1 98 0M
1 98 4M
1 98 8M
1 99 2M
1 99 6M
2 00 0M
2 00 4M
2 00 8M
50
June 23, 2009
2
Spikes in food commodity prices:
Will this time be any different?
Index: 2005 = 100
600
Corn
Soybeans
Wheat
Rice
Food commodity index
550
500
450
400
350
300
250
200
150
100
50
0
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
Source: International Monetary Fund: International Financial Statistics
June 23, 2009
3
Annual Percent Change
CPI vs. CPI for Food 1970-2009*
16
14
12
10
8
6
4
2
0
-2
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
CPI
June 23, 2009
CPI for Food
*Forecast
4
PPI for Retail Grocery Department Margins
20
15
10
5
0
-5
2001
2002
2003
2004
2005
2006
2007
2008
LTM
-10
-15
-20
Grocery PPI
Meat PPI
Bakery PPI
Frozen Food
June 23, 2009
Center Aisle Food Items
Dairy PPI
Produce PPI
5
Sources of Retail Price Changes

Changes in Costs



Cost of Goods Sold
Operating Costs
Changes in Retail Market Competition


Number of retailers in a market
Type of retailers



Specialization
Differentiation
Changes in Consumer Demand
June 23, 2009
6
Where a Consumer Dollar Spent on Food Goes
Depreciation and
Repairs, 5.0%
Rent and Interest,
6.5%
Profits, 4.0%
Taxes and Other
Costs, 7.0%
Labor, 38.5%
Energy and
Transportation ,
8.0%
Advertising and
Packaging, 12.0%
Farm value, 19.0%
Source: Economic Research Service Calculations
using 2006 Data
June 23, 2009
7
Objectives

Model the magnitude of pass-through



Identify mitigating factors
Identify differences across food groups
Estimate time to pass-through by food
category
June 23, 2009
8
Motivation- an Egg Example
$2.00
$1.50
$1.00
$0.50
$0.00
2002
2003
2004
Farm-Level Price
2005
2006
Wholesale Price
2007
2008
Retail Price
Sources: USDA, BLS
June 23, 2009
9
U.S. Egg Price Trends, 2002-2008
Year
Farm
-Level
Price
Percent
Change
Wholesale
Price
Percent
Change
Retail
Price
Percent
Change
2002
$0.61
0
$0.67
0
$1.03
11
2003
$0.75
23
$0.88
31.3
$1.24
20.6
2004
$0.70
-6.7
$0.82
-6.8
$1.34
7.6
2005
$0.54
-22.9
$0.66
-19.5
$1.22
-9.1
2006
$0.57
5.6
$0.72
9.1
$1.31
7.2
2007
$0.93
63.2
$1.14
58.3
$1.68
28.3
2008
$1.07
15.1
$1.28
12.3
$1.99
18.7
June 23, 2009
10
Retails foods covered in this analysis
 Beef
 Milk
 Pork
 Bread
 Poultry
 Oranges
 Eggs
 Lettuce
June 23, 2009
11
Data

Monthly Change in PPI and CPI for Ag,
Energy and Food Items



Eight Retail Foods
Related Farm and Wholesale PPIs
Crude Oil and Gasoline PPIs
Grocery Store Wage Data (Current
Employment Statistics)
 Time Period: 1972-2008

June 23, 2009
12
Multi-Stage Price Transmission (1)

Cattle, Hogs, Poultry, Milk, Eggs




Retail Meats, Milk, Eggs



Corn, Soybeans, and Crude Oil
Allow for up to 24 months of lags
Account for Autocorrelation in time series
Cattle, Hogs, Poultry, Milk, Eggs
Wholesale Gasoline and Grocery Store Wages
Time Lags and Autocorrelation


Allow for up to 24 months of lags for RH-side
Account for autocorrelation in error terms
June 23, 2009
13
Multi-Stage Price Transmission (2)

Wheat Flour


Bread




Wheat and Crude Oil
Wheat Flour, Wholesale Gasoline, Grocery
Store Wage
Allow for up to 24 months of lags
Account for Autocorrelation in time series
Time Lags and Autocorrelation


Allow for up to 24 months of lags for RH-side
Account for autocorrelation in error terms
June 23, 2009
14
Farm-Level Results Summary
Corn
Soybeans
Crude Oil
PassTime to
PassTime to
PassTime to
Through
Pass
Through
Pass
Through
Pass
Rate
Through
Rate
Through
Rate
Through
Dependent
(percent) (months) (percent) (months) (percent) (months)
Variable
Cattle
8
2 to 9
6
4 to 9
10
2
Hogs
15
3
Negative
4 to 6
5 to 10
9
Poultry
16
4
6
2 to 4
3 to 4
9
Eggs
27
6
Negative
3 to 5
3 to 5
2 to 4
Milk
4
2 to 4
5
6
Negative
4 to 6
June 23, 2009
15
Wheat Results
Dependent
Variable
Wheat Flour
June 23, 2009
Wheat
PassTime to
Through
Pass
Rate
Through
(percent)
(months)
41
1 to 2
Crude
PassThrough
Rate
(percent)
3
Oil
Time to
Pass
Through
(months)
4
16
Retail Summary (1)
Farm-Level Price
Energy
Grocery Store Wages
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
Beef
6 to 18
1 to 2
Negative
3
Not Stat.
Significant
----
Pork
2 to 4
1 to 3
2
2
5 to 10
8 to 21
Poultry
6 to 8
1 to 2
3
2
Negative
7
Eggs
5 to 8
3 to 5
5
6 to 9
Negative
4 to 17
Dependent
Variable
(Retail
Prices)
June 23, 2009
17
Retail Summary (2)
Farm-Level Price
Dependent
Variable
(Retail
Prices)
Energy
Grocery Store Wages
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
PassThrough
Rate
(percent)
Time to
Pass
Through
(months)
Milk
5 to 18
1 to 5
2
2 to 3
Not Stat.
Significant
----
Bread
2 to 6
1 to 6
2
1 to 4
8 to 10
17 to 20
Oranges
11
1 to 2
Not Stat.
Significant
----
10 to 15
2 to 13
Lettuce
16
1 to 2
Not Stat.
Significant
----
Not Stat.
Significant
----
June 23, 2009
18
Commodity to Retail Pass-Through (1)

Corn to Retail Beef: 1.5 percent



2008: Corn up 60 percent-Beef up 0.9 percent
Explains about 20 percent of actual retail beef
price increase
Corn to Retail Poultry: 1.3 percent


2008: Corn up 60 percent-Poultry up 0.8
percent
Explains about 15 percent of actual retail
poultry price increase
June 23, 2009
19
Commodity to Retail Pass-Through (2)

Corn to Retail Eggs: 2.2 percent



2008: Corn up 60 percent-Eggs up 1.3 percent
Explains about 9 percent of actual retail egg
price increase
Corn to Retail Milk: 2 percent


2008: Corn up 60 percent-Milk up 1.2 percent
Explains about 20 percent of actual retail milk
price increase
June 23, 2009
20
Commodity to Retail Pass-Through (3)

Wheat to Bread:1.4 percent



2008: Wheat up 160 percent-Bread up 2.2
percent
Explains about 16 percent of actual retail
bread price increase
Corn to Retail Milk: 2 percent


2008: Corn up 60 percent-Milk up 1.2 percent
Explains about 20 percent of actual retail milk
price increase
June 23, 2009
21
Summary

Food and energy commodity price changes to
farm and wholesale prices



Farm and wholesale prices change to retail prices



Time: 2 to 9 months
Pass-through: 2 to 41 percent depending on the product
in question.
Time: 1 to 6 months
Pass-through: 2 to 18 percent.
Implies that commodity price changes take 4 to
27 months to pass through to retail prices and
are passed through at rates ranging from less
than one-half percent to nearly 7 percent.
June 23, 2009
22
Future Research Extensions
More Food Categories
 Additional Explanatory Variables
 Test for assymetric adjustment



Sub-time period analysis


Price increases vs. decreases
Has the relationship changed over time?
Are there key threshhold levels at which
commodity price change begin to impact
retail prices in a significant way?
June 23, 2009
23