How Much and How Quick? Pass through of Commodity and Input Cost Changes to Retail Food Prices

Following the food, energy, and overall commodity price surge from mid 2007 to mid 2008, both domestic and international retail food prices rose at an accelerated rate for most of 2008. These changes sparked a renewed interest in both food policy and food industry arenas in estimates of the magnitude of the effect of commodity price changes on retail food prices. The subsequent drop in commodity prices during the fourth quarter of 2008 and beginning of 2009 led to the same set of questions in the opposite direction. What impact do volatile swings in commodity prices have on retail food prices? This paper uses Bureau of Labor Statistics (BLS) price index data across various stages of food production along with data on energy and wage costs to estimate: how much of the change in commodity costs is generally passed through to retail prices; how the pass-through rate varies by food type; and just as important, the time lag between commodity price changes and retail price changes across a number of food groups. A number of factors combined to lead to the run-up in commodity prices in 2007 and 2008. Trostle (2008) divides these factors into supply and demand effects and shows that tight market conditions were the impetus for the sharp increase in food commodity prices. More rapid expansion in demand and slower growth in production began in the 1990s and contributed to declining global demand for reserve stocks of grains beginning in the early 2000s. Then, rising oil prices and evolving biofuel policies provided incentives to expand biofuel production in some countries. In addition