The economy affects food costs in unpredictable ways.
Food prices in the United States are part of the global economy and the effect of world markets on food costs is unpredictable. Prices of commodities like wheat, corn and milk, which are staples of the family food budget, are influenced by a variety of interactive forces. The cost of oil, which is essential to the manufacture and transport of food products, is determined by global markets. The foreign exchange rate -- or the rate at which U.S. currency is measured against other currencies -- determines the price at which the U.S. buys and sells food products in foreign markets; this can affect food prices at home. Government policy during economic cycles can also influence food prices.
Commodities and the World Market
Wheat, corn, soy and other grains are staple commodities that are sold in the United States to make things like bread, cereal and a large number of processed foods. U.S. food products are sold to other countries in the world as well, and the amount that we sell, or export, can affect food prices in this country. When other countries have economic downturns or have bad harvests, bad weather or food shortages, we export more. With this increased demand on our commodities, prices can go up everywhere. When the world economy is good and global food supply is abundant, we export less and prices in the U.S. may remain stable, or even fall.
Food Prices and the Cost of Oil
Oil is necessary to the manufacture and transport of food in the United States; farming, food processing and trucking all use large quantities of gas and oil. Oil prices are dependent on foreign markets and the global economy. When oil prices rise, businesses will pass on higher costs to the consumer in the form of higher food prices. During global economic downturns, there is often less demand for energy and oil on world markets. Food prices in the U.S. might fall as a result. During robust economic periods, demand for oil may rise, causing higher prices for both energy and food.
Policy, the Economy and Food Prices
During economic downturns and recessions in the U.S., politicians may try to influence food prices by creating policies that they think will benefit businesses or consumers. Policy makers may restrict exports to keep supplies abundant and prices low. When U.S. currency falls against other currencies, foreign demand will rise because the products will seem cheaper to other countries. Rising demand can mean higher domestic prices in the long run. The government also subsidizes farm programs that can affect food prices. An example would be government subsidies for ethanol, a fuel made from corn. Ethanol subsidies can limit the supply of corn that can be used for food and prices can rise.
Food Prices and Local Demand
When the economy is bad people have less to spend on food and demand falls. In a supply and demand economy that should mean that all food prices drop in a weak economy. But because food economy is global this does not always happen. Some discretionary (non-staple) food products may go down in price, but staples are generally "recession-proof". People will always buy basic food items like bread and milk. The cost of manufacture, transport and world demand affect staple food prices much more than local demand.
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