Food Inflation
Since Covid in 2020, food prices have become much more interesting than they should be. In 2022/2023 food inflation was above 13% YOY which reduced industry unit growth by about 7%, and today tariffs are the next chapter in an uncertain future. The intent of this page is to help retailer's understand what drives these food inflation swings so they can anticipate and use to their advantage
The Supply Chain
Food prices are driven by a myriad of factors, but the four largest drivers are oil prices, farm products, food manufacture, and grocery retail margins.
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Each are leading indicators. That means what is happening with oil prices today will not fully impact food prices for several months. In other words, today's food prices are being impacted by oil prices from several months ago.
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Thus, understanding this lagged structure is essential for building a useful model
Oil prices are the beginning of most supply chains. The highs and lows ripple through the economy, impacting most industries. This is particuilarly true for farm products which rely on equipment, fertilizers, and other petroleum based inputs
Farmers do not have room for waste. Competition keeps commodity farm products at prices just high enough for production to occur. As such, they are also very susceptible to input costs, like oil, that must be added to farm product prices because there is little room for farmers to absorb higher costs
Food manufacture costs are driven largely by farm prices and the push for margin. This section is dominated by a few large companies with tremendous market power, particularly over smaller regional and local distributors and retailers. Becasue of their size relative to farmers and retailers, they capture most of the value in the grocery retail market
The last part of the chain is Grocery margin. It is the difference between what grocery retailers pay for food and what they sell that food for. Because of the intense competition, grocery retail profits are in the 1%-2% range. As such, like farmers, many regional and local grocery retailers simply do not have the room to eat higher costs so they are passed onto consumers.
The Model
As mentioned above, food prices are impacted by many factors and it is the job of the data scientist to keep the model as simple as possible. That means finding those inputs that have the biggest impact on the target output - food prices.
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After analysis and interation, a base model was defined based on the four inputs above. This model will also evolve as market factors evolve, which is one of the benefits of using Machine Learning models. They learn and adapt as the inputs evolve
Inputs
The supply chain intputs are carefully monitored and estimated forward. These are the factors that move food inflation up or down.
Supply Chain Lags
It takes time for costs to ripple through the supply chain. Knowing how long it takes for oil prices, food prices, and food manufacturing prices to impact food inflation, is essential for building an accurate model.