September 15, 2016
Depending on what ingredients you use in your products, you may be finding that your costs are much lower than anticipated or higher than this time last year. A quick look at the latest report from the USDA (which currently shows information through July 2016) explains why:
There’s two pieces of this puzzle to take a look at and we’ll start with the Producer Price Index (PPI). The PPI measures price over time for how much producers are paid for raw foodstuff materials. So, for example, it is measuring how much you’re paying for eggs, beef, and vegetables (amongst numerous other food categories). The USDA reports that across many of the main categories, prices are down – and in some cases, down significantly, from this time last year. Beef, for example, is currently down 19.4% from this time last year. Eggs, a major ingredient for most bakers, have had a dramatic drop in price at the farm level of 67.4%. Fruits and vegetables saw a price drop on a month-by-month basis but those are still higher than this time last year; due in part to the drought in California.
The other piece of the puzzle is the CPI, the Consumer Price Index. This is the price that consumers are paying for products. Typically there is a correlation between a drop in prices at the PPI and the CPI level but by looking at the CPI one can get a sense of how finished food products are doing. The CPI reports that, like the PPI, there is a decline in prices that consumers are paying at the supermarket which is measured by the ‘food-at-home’ category (versus restaurants which is categorized as food-away-from-home). In the food-at-home category, the CPI is 1.6% lower than last July which is the largest year-over-year drop since 2010. A good portion of that drop is coming from protein and products made with proteins (including eggs which has a decrease of 29% from last July).
So what does this mean for you? Again, a large part depends on what you make but you may notice that your margins are increasing as your food costs lower. Of course, raw ingredients aren’t the only cost you have to be concerned about. Labor can be very expensive, especially in cities that have passed minimum wage laws requiring hourly rates of at least $15. Similarly, if packaging is a big component of your overall costs, you may not be noticing as much of an increase in your margins if your packaging costs are staying the same or even increasing.
Why do I even share this information? Because I think it’s interesting to understand what’s going on in the macroeconomic environment. Ultimately you may or may not use this information in your business, but always better to have the information before you make that decision.