Cost of Food

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COST OF FOOD

COST OF FOOD. The cost of food is viewed from two perspectives. One is the cost to households, the other is the cost of production and marketing. Since food is a basic necessity in every society, a falling portion of household income needed to purchase food is an indicator of growing households' incomes and a measure of improved national economic development. In high-income countries the percentage of income needed for food is smaller than in low-income countries. This phenomenon reflects an economic principle known as Engels' Law. As income rises, the percentage of the additional income spent on food declines.

Consumers' Food Costs

In the United States the percentage of personal disposable income (PDI) spent for food fell precipitously during the second half of the twentieth century from 20 percent in 1960 to 11 percent in 2000 (see Figure 1). At the beginning of the twenty-first century the United States had the lowest ratio of food expenditures to PDI in the world. Expenditures for food ingredients to cook at home fell in tandem with the decline in the percentage of income spent on all food. Expenditures on food from restaurants and other food service places remained steady at around 4 to 5 percent of PDI in the late twentieth century. Consequently the percentage of households' total food budget spent for food service increased from 27 percent in 1960 to 47 percent in 2000.

Expenditures on food rise with income and the number of people in the household. The absolute amount spent on food rises with income as consumers shift to more expensive brands, higher-quality food, and more convenient forms of food, including more food eaten away from home. Households with only one person spend 16 percent more per person on food than households with two people and 62 percent more per person than households with four people. Per capita expenditures for food are greater for single people because of the economies of scale involved in feeding more people in the same household. With more people to feed, less waste occurs from preparing full recipes, and people are more inclined to cook food at home. Single persons tend to eat more food away from home, increasing their food costs (Blisard, 2000, pp. 23–26).

Lower-income households spend about two-thirds the number of dollars per person on food compared with higher-income households and about 85 percent as much compared with middle-income households. Even though households in the lowest income group spend fewer dollars on food, these expenditures account for almost half of their incomes. Those in the highest-income group spend only 8 percent of their incomes on food. The average food expenditure, 11 percent of PDI, represents middle-income households and hides the fact that great disparity persists.

Production and Marketing Costs

Production and marketing costs determine the minimum price of food in the retail marketplace. Production costs are typically called the "farm value" of food, and they comprise about 20 percent of the final food cost. This percentage varies by type of food, depending on how highly processed or perishable the food is. The farm value for meats and dairy products is around 28 percent, for poultry around 41 percent, for cereals around 5 percent, for fresh fruits 16 percent, and for fresh vegetables 19 percent. As consumers demand more highly processed foods, fresh foods from distant places, and foods ready to eat, the farm value falls as a percentage of the retail price.

Marketing costs have risen as a percentage of retail food prices. The "marketing bill" as defined by the U.S. Department of Agriculture is the difference between the farm value of domestically produced foods and the final cost to the consumer (see Figure 2). Marketing costs rose 3.5 times faster than the farm value between 1990 and 1999. At 39 percent, labor is the largest portion of the cost of food, rising 56 percent during the 1990s. Over half of the 14 million food industry workers in 1999 were in food service. Retail food stores employed 3.5 million or about one-fourth of all food industry workers. About 12 percent of food industry employees worked in food processing, and about 7 percent worked in food whole-saling. The escalating demand for labor increased wages and the benefit costs for food workers. Food store employees' wages rose 27 percent during the last decade of the twentieth century. As consumers delegate more of the basic cooking and preparation of food to others in the food chain, labor costs can be expected to rise as a portion of the total food cost.

Packaging costs comprise about 8 percent of total food costs, and they increased almost 40 percent in the 1990s. This increase is a function of the cost of paper and plastics and the demand for more conveniently packaged foods. Package design changes and packages that can be used directly for cooking and for eating or drinking increase the cost of packaging relative to the basic food.

Raw commodities (farm value), labor, and packaging comprise 67 percent of the cost of food. The rest of the costs are in transportation, advertising, rent, profits, energy, business taxes, depreciation, interest payments, miscellaneous costs, and repairs. These last types of costs have increased at about the rate of inflation and have not changed their share of the food dollar much over time.

Since considerable price competition exists at the retail end of the food chain, the marketing chain tends to absorb increases in the cost of raw commodities. Also the cost of the raw commodity is a relatively small percentage of the total cost. In the case of cereals, cyclical fluctuations in grain prices barely affect the final food price. One way for manufacturers to decrease their risks of price fluctuations in raw materials is to contract with farmers for a set amount of commodity at a set price that does not change at the whims of the market.

Retail food costs are a function of the production and marketing costs and the intersection of supply and demand. Since most foods have a limited shelf life, retailers want to sell products as soon as possible, keeping prices competitive. On the other hand, total food expenditures are a relatively small part of most consumers' budgets, and an increase in the price of one food type does not change spending patterns much in the face of numerous substitutes. Taken together these two impacts are called the price and income effects on the quantity of food purchased. The other effect is the limited capacity of human beings to consume food. Once humans are physically satiated, food expenditures rise due to consumers' demands for more quality, variety, convenience, and service but not for more food to eat.

See also Advertising of Food; Consumption of Food; Distribution of Food; Food Politics: United States; Food Supply and the Global Food Market; Food Supply, Food Shortages; Marketing of Food; Places of Consumption; Political Economy; Restaurants.