How today's falling food prices create challenges for manufacturers

By Carolyn Heneghan | August 31, 2016

Dive Brief:

• Food prices are still falling, with the U.S. on track for the longest stretch of food price declines in more than 50 years.
• This trend continues due in part to excess domestic supplies of dairy products, meat and grains, and less international demand for them. Economists credit by currency headwinds, particularly in China, and lower energy costs for transportation and refrigeration.
• At-home food prices declined 1.6% on a seasonally unadjusted basis in the 12 months through July, according to the Bureau of Labor Statistics.

Dive Insight:

While falling food prices may be good news to consumers, many manufacturers and their suppliers are struggling. USDA has had to bail out a number of food industries recently, including eggs, cheese and dairy producers, as farmers struggle with supply gluts and sagging demand for these products. Gluts are so severe that dairy farmers have resorted to dumping millions of pounds of excess milk onto fields.

Luckily, many manufacturers have focused on cost-cuttingin recent years, which helps maintain the bottom line even when pricing strategies have to adjust with the changing times. These supply gluts and demand issues primarily confront manufacturers' ingredient suppliers and farmers, with manufacturers benefiting from lower input costs.

But those costs won't stay low forever. Food costs will likely bounce back at some point following bailouts and future shifts in international demand. And when they do, manufacturers may have to rely on their leaner, more cost-effective operations or raise prices for consumers at retail.

Raising retail prices can be tricky for manufacturers. Consumers have said they would pay more for products with natural ingredients. But when Smucker had to raise coffee prices due to supply issues in Brazil, consumers stopped buying, and its brands' market share took a hit. It took several months and price decreases for Smucker's U.S.coffee sales to rebound.