BACONomics: Biden’s plan to reduce food price inflation

Last week I wrote about how Russia is trying to keep food price inflation down (within Russia) by implementing export tariffs on goods like sunflower oil, metal, and wheat. How much that will help keep prices down and what the long-run impacts will be are left to be seen.

This week, let’s talk about Biden's idea on what to do in the U.S. It’s a different approach to the same problem.

As a review: food prices are increasing. The USDA reports that food prices from August 2020 to August 2021 increased 2.7 percent. Interestingly, "Of all the CPI food-at-home categories tracked by the U.S. Department of Agriculture (USDA) Economic Research Service, pork has had the largest relative price increase (5.4 percent) and fresh vegetables the smallest (0.5 percent). No food categories have decreased in price in 2021 compared to 2020."

A lot of the overall food price increase is due to disruptions in supply caused by COVID related issues and some related to natural disasters. Meanwhile, demand has remained high or is increasing for certain products – both domestically and internationally.

This is exactly what happened in the meat market. I wrote about it last year. For more detail, check out the article. But, in short, during the early months of the pandemic, many workers in meat packing factories started getting COVID. Because of this, those factories had to temporarily shut down. These shutdowns not only caused decreases in meat available in stores (increasing prices in grocery stories), but it also decreased the demand for livestock – if meatpacking factories can’t operate, they won’t buy meat to pack… These issues are not immediately righted and likely have had carry over effects to now.

Pork prices in 2020 had been pushed even higher because of a large demand from China – a population of people that consumes a lot of pork but whose own supply of pigs were dwindling because of the swine flu. This also contributed to higher prices. Now it appears their pig population has rebounded and pork prices in China have fallen. Maybe good news for U.S. bacon prices?

Ok, so that was mainly 2020. What is going on in 2021 that is causing meat prices to be even higher than they were last year? Some of it is likely supply issues – labor shortages, increased feed prices, and lingering effects from the 2020 factory shutdowns. However, the price increase appears to be from a large increase in demand for pork because overall supply hasn't been affected too much.

Honestly, it is pretty confusing to me where this push is mainly being driven, but... What are people in the US doing more in 2021 than they were in 2020? Eating in restaurants! Restaurants then need to buy more pork.

Regardless of the reasons, we have decreased supply. High demand. Result: higher prices. To see how much prices have increased, check out the data from Bureau of Labor Statistics reported on FRED.

Here comes Biden’s proposal: break up the large companies that dominate the meat industry. Another Econ101 lesson: more competition lowers prices. Think about it from your own perspective: if there are more options of bacon to buy with roughly equal taste, you’ll be more price sensitive (more elastic). Firms then have less ability to mark-up prices above their marginal cost of production.

More firms --> lower prices, typically.

However, whether that relationship occurs depends on the economies of scale from larger production. If larger firms can produce at lower average costs than a bunch of smaller firms, this relationship might not hold.

But, let’s assume that if we increased competition, it will lower prices. That’s what President Biden is proposing.

How to increase competition. The White House report includes four plans:

1. One way to increase competition is to just reduce collusion (firms working together to set prices or quantity). Collusion is illegal in the U.S.; however, it happens. And people in the chicken industry have recently been caught doing just that (https://www.bakeonomics350.com/single-post/collusion-in-the-milk-market-tres-leches-cake).

2. Relief money to smaller producers to support greater competition.

3. Provide greater assistance money to farmers when there are extreme weather events that affect the supply. For this one, it’s not clear to me how this relates to affecting competition versus just keeping prices down.

4. Legislation to increase transparency between meatpackers and livestock producers. Again, the idea is to increase competition. In this case, increased competition is through increased information.

Will any of these policies be implemented? Will any of them have an effect on meat prices? How about overall food price inflation? We’ll have to see.

Maple Bacon Doughnuts

These maple bacon doughnuts from Sally's Baking Addiction are perfection. I made them in the morning one day and they were still good that evening -- an impressive trait for a doughnut.

I followed the recipe exactly, so you can check out her blog for the steps. My one hint relates to getting the right temperature of oil. Use a thermometer to see the temperature and then try a few doughnuts first to see if they are frying right. Some of mine turned out too dark at first, so I had to turn the temperature down.