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Jerry Light and Thomas Shevlin
The Midwestern drought of 1995–96, rising foreign demand for U.S. feed grains,1 and substantial commodity market speculation combined to markedly drive up feed grain prices in 1995 and 1996. This sharp increase initiated a classic pattern for food inflation. The price increases, especially those for corn, soybeans, and wheat, ignited the inflationary spiral at the most basic or crude stage of processing. As time passed, this inflationary swell spilled over into intermediate and finished goods, culminating in an overall increase in food prices.
This article tracks an inflationary spiral in food prices from the grain fields of the Farm Belt to kitchen tables across America during the drought and in subsequent months.
Prices for agricultural commodities such as feed grains are inherently volatile, because they are susceptible to both supply and demand shocks. Examples of supply shocks are weather- or disease-related shortcomings, or conversely, the production of bumper crops in good years. Demand shocks usually come in the form of unexpected purchases by foreign buyers, for example, the unexpected purchase of large amounts of American wheat in the 1970s by the Soviet Union.
Any large change in agricultural prices can have a significant impact on the Producer Price Index (PPI) for crude foodstuffs and feedstuffs, the first of the PPI’s three stage-of-processing indexes for foods. The impact of the price shock can then pass from crude foodstuffs and feedstuffs on to intermediate foods and feeds, and then to finished consumer foods, along the PPI's stage-of-processing model.
As price shocks pass from one stage of processing to the next, the amplitude of the shocks tends to diminish somewhat at each stage of processing. Chart 1 illustrates the effect of the 1995 grain price shock as it passes through the food industry. The graph spans January of 1995 through December of 1997, and shows the percent change for the three PPI’s based on their January 1995 levels.
This excerpt is from an article published in the August 1998 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Footnotes
1 Feed grains (as used in this article) are grains that are inputs to food and animal feeds. The predominant feed grains are corn, soybeans, and wheat. ‘Cash grains,’ ‘bulk grains,’ and ‘grain commodities’ are all synonymous with feed grains.
Related BLS programs
Producer Price Index
Producer price highlights, 1996.—July 1997.
Producer price highlights, 1995.—July 1996.
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