May 26, 2016
On the eve of Memorial Day weekend, the unofficial start of Summer here in the US, it seems like the perfect time to share some insight into if today’s low oil prices will impact the prices you pay for your ingredients.It seems like every year I do an article in the Summer talking about what we can expect from ingredient costs through the second half of the year and this year, one of the biggest stories everyone is talking about is how/if/why oil prices may or may not come into play.
Why Are We Even Talking About Oil Prices On A Food Business Website?
It’s important to note that food prices are very much impacted by oil prices – at least in the US. That’s because oil plays a critical, if often under noticed, role in the food system. Our farms are highly dependent on oil to fuel the farm machinery that’s used to grow and harvest our food and/or feed and care for animals. Beyond that though, there is significant oil used in the transportation of those goods to intermediary processing facilities and then to distribution centers. From there the ingredients are purchased by you and transported to your kitchen facility but the oil trail doesn’t stop there. After you’ve produced your products you must get them in front of the world and that takes oil. Be it oil to drive your car from your kitchen to the farmers market, oil to power your food truck, oil to fuel the planes that ship your orders to retail partners or to online consumers…the list goes on and on.
And those oil costs have to be accounted somewhere so they are essentially added to the price of the product.*
As you can see in the above graphic, there is a very close tie between increases and decreases in oil prices and in food prices.
The other reason it’s so important to consider oil prices as a small food business entrepreneur is that, unlike the large food manufacturers, you are most likely not hedging ingredient futures. By this I mean, large food companies have people on their financial teams whose job it is to help minimize fluctuations in food costs by analyzing the stock market and buying appropriately. Most small food entrepreneurs aren’t doing this so we don’t have the benefit of trying to smooth out ingredient pricing. Similarly, because we don’t have large economies of scale, we can’t bring down pricing from our ingredient suppliers significantly like the large food producers can.
What then are the predictions for oil prices throughout the rest of this year and how will that impact food prices?
Oil prices closed on May 20, 2016 at $47.75. This was slightly higher than oil had been trading for the previous three months but as you can see, overall, oil prices are down significantly from this time last year.
The US Energy Information Administration, in their Short-Term Outlook, predicts fairly stable oil prices through the end of the year and nothing nearing the almost $100 barrel that made 2014 so volatile. If that proves to be the case then you can anticipate that ingredient prices will also remain fairly stable as well.
What other factors may come into play?
Any time you talk about agriculture, weather is the other big unknown. If Mother Nature is kind to us this year we may see lower than normal ingredient prices through the end of the year. It basically comes down to one major thing – we need rain…but not too much of it.
Many parts of the Western US are still under a major drought and with this part of the country producing a significant amount of the fruits and vegetables in the country, this is a big concern. On the heels of drought also comes worry about wildfires which swept through my home state of Washington last year like never before. The fact that Canada is already battling major wildfires and it’s only May is a huge concern. Wildfires have the potential to dramatically increase food costs depending on where they hit.
By the same token though, too much rain can bring with it flooding and landslides. We’ve seen this happen before in the ‘breadbasket’ of the US where the majority of corn and wheat are grown in states like Kansas and throughout the South. Just like drought wreaks havoc on crops and animals, so too, obviously, does flooding and ultimately this year price fluctuations in food may more be a result of Mother Nature than Big Oil.
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*If you’re reading this and thinking, wait, I don’t add in my oil costs to my products’ costs, remember that you have your base costs (your ingredients, packaging, and labor) but to that you add a margin that is essentially supposed to cover the other costs associated with running your business – such as the fuel costs of getting your product to consumers.