Why hasn't innovation in the agricultural industry led to a significant reduction in food prices?

Question

There has been a lot of innovation in the agricultural industry. GMO, giant silos, factory farming, machinery, etc.
But if we look at actual food prices since 1960 food actually got more expensive. So why hasn't the innovation led to a drop in food prices?

The source you use for your historical data ("Macrotrends LLC") doesn't seem to make it very clear where their data comes from, but it appears that they are tracking nominal US dollar prices without adjusting for inflation. Is that accurate? If so, prolonged general price inflation is sure to explain almost all of the rise that you see in the chart. Compare the nominal trend to the "real" trend (i.e., adjusted for general price inflation) in agricultural prices according to USDA: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=76964 — AlabamaScholiast, May 17 '22 at 14:34
Adding to the great comment of @AlabamaScholiast, it seems March 2020 was about the same price (somewhat cheaper) as March 1975. Per capita income in the US was $ 5,851 in 1975 according to this source. It was already 47,697 in 2015, which is more than 8x the 1975 level. It's a quick and dirty comment, but it still shows food is a lot cheaper, especially when factoring in how much inflation happened since 1975. — AKdemy, May 17 '22 at 14:37
It's because your dataset doesn't go back far enough. The last major innovation in wheat farming, the development of dwarf and semi-dwarf variants, happened in the 1950s, and the really big productivity booster, the combine harvester, was developed in the 1880-1930 era. — Mark, May 17 '22 at 23:55
Good comments. Note that the prices have spiked this year (not in USDA charts), but this is due to short-term shocks: "Chicago wheat futures climbed to a 14-year high of $12.8 per bushel on fears of lower supplies as India banned wheat exports and the USDA reported worsening conditions of the U.S. winter crop. This added to the already tight market caused by supply disruptions from the Black sea region as Russia invaded Ukraine" -Source:https://tradingeconomics.com/commodity/wheat — user1521620, May 18 '22 at 06:36
As a pithy note, the demand for food has likely increased over time as populations increase. So keeping the price of food level would imply increased food supply, at least. — RegressForward, May 18 '22 at 13:49
"So keeping the price of food level would imply increased food supply..." But global food supply has dramatically increased since 1960. And in fact food supply has persistently outpaced population growth. The long-term secular trend in nominal prices is not due to population outgrowing food production. (It isn't and hasn't been.) It is overwhelmingly due to general price inflation across all consumer goods, including but not limited to food. — AlabamaScholiast, May 18 '22 at 15:35

score 33 · Accepted Answer · edited May 18 '22 at 13:01

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Why hasn't innovation in the agricultural industry led to a significant reduction in food prices?

Mostly (present couple of years excluded) this is because of inflation. Inflation means money loses value. A dollar today does not have the same value as a dollar in 1900. The same holds for almost every currency around the world.

More recently, real food prices also increased due to Covid19 supply chain disruptions and the Russo-Ukrainian war.

Furthermore, your claim:

But if we look at actual food prices since 1960 food actually got more expensive.

is not very accurate. First you only show food prices for wheat, not for all food. Second, food did not actually became more expensive over time, but cheaper over time (excluding a recent few years for which I was not able to find good data source for historic comparison, and likely Covid19 and the current Russo-Ukrainian war will affect real price of food).

As you can see below real food prices dropped over time (even though there was an increasing trend recently). What happened is that food got cheaper thanks to productivity increases, but money lost its value faster than food got cheaper. As a result value of food in terms of US dollars or Euro rose, but value of food in real terms got cheaper.

Overall real food price index around the world from Polaski (2008):

US real food price index for all food and home-cooked food from Christian and Rashad 2007:

Recently, there was increasing trend in real food prices, just anecdotally at conferences you could see a lot of papers worrying about high food prices impact on development. This was due to Covid19 lockdowns supply chain disruptions and the Russo-Ukrainian war. However, I was unable to find any source that would have recent real price index that would allow comparing today's prices with prices in 1900s or 1950s. Supply chain disruptions decrease overall productivity (e.g. value created divided by inputs), and the Russo-Ukrainian war just means that most of the world cannot (or put restrictions on accessing) access food production of large food producers, namely Russia and Ukraine.

edited May 18 '22 at 13:01

Glorfindel

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answered May 17 '22 at 14:31

1muflon1

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Another way to look at it is by looking at the fraction of income people spend on food. While "food away from home" has gone up, the fraction of wages for "food at home" has droped by one half since 1960. – R.M. May 18 '22 at 22:55
@R.M. But that could be due to incomes getting larger faster than cost of food. Hence if the growth rate of food cost is $g_f$ and growth rate of income is $g_Y$ you will empirically observe that income share spend of food $F/Y$ will decline if $g_f<g_Y$ even if $g_f>0$. So we need to check real food prices to answer this nonetheless – 1muflon1 May 18 '22 at 23:15
Inflation-adjusted "real" prices have the problem that inflation is based on expenses that include food prices. So it's partly circular. Admittedly that problem was bigger when a larger fraction of income was spent on food. – towr May 19 '22 at 10:45
@towr 1. inflation is not based on expenses inflation is positive change in price level not change in expenses. 2. Could you please explain what do you mean by circularity? Real price means price adjusted for the fact that value of unit of currency changes. For example, suppose that in physics people would decide to change definition of meter by adding 10cm each year. Then ‘real length’ would be length that always uses the same definition of meter. How would the fact that plank of wood has length that was measured in original meters create a circularity? – 1muflon1 May 19 '22 at 10:57
Real just mean in economics that you use the same value for monetary unit over time instead of mixing value of a unit today with value of a unit yesterday – 1muflon1 May 19 '22 at 11:00
Inflation is based on the price increase of a fixed "basket" of commodities that include food. The items in the "basket" are weighed in some way (presumably to represent how people divide their income over it, which is what I meant with expenses). For example in the euro zone food is weighed 16.6%. If everything in the basket uniformly doubled in price, then the inflation adjusted price before and after would be unchanged. Adjusted price only changes when prices change relative to the basket, – towr May 19 '22 at 11:23
Now, say if food was weighed 50%, then tripling its price would cause 100% inflation. But the inflation-adjusted price increase is only 50%, not 200%. So due to the circularity caused by the price of food being part of the standard it's measured against, it looks much better than it is. – towr May 19 '22 at 11:34
@towr but it’s not true that if uniformly price would doble inflation would not change. If price would double uniformly that would represent increase in price level from 100 assuming first year is base to 200. The weighting is done because when we measure price level we do not actually observe every single price (although there are new projects like thousands price project that tries to do that). We sample some food prices, some car prices etc then weighting is done to make sure that our sample is representative. For example if we sample 100 food prices and 100 car prices we would have to – 1muflon1 May 19 '22 at 11:37
Weight the prices to make sure they are representative of an economy as a whole. This is the same thing as where opinion polls will be weighted by known demographic share because different demographic shares might have different response bias this does not create circularity this is to get rid of the bias. Similarly the weighting is done to make the price level and inflation measurement less biased – 1muflon1 May 19 '22 at 11:39
Let us continue this discussion in chat. – towr May 19 '22 at 11:43
Also I am not sure if you understand how prices work, prices are always relative. There is no absolute price. For example if price of corn is 10 dollars per bushel that means that $10d=1b$. So the price is relative as it represents $10/1=b/d$. Hence price can increase for two reasons either bushels get more expensive b goes up or dollars get more cheaper d goes down. The whole point of construction of price level is to filter all changes in $d$. If d goes down that’s not bushels getting more expensive that’s dollars getting less expensive – 1muflon1 May 19 '22 at 11:44

score 5 · Answer 2 · answered May 19 '22 at 08:59

The data in 1muflon1's answer of the inflation adjusted food prices seems implausible: The perceived difference to me is much greater, anecdotally, than the <20% reduction the data shows for food consumed at home. My mother in law, in Texas, stretched the Tuna for sandwiches for her children, and my family in Germany was typically eating pork, not beef, and even that not often, because beef was too expensive. These are not concerns for us today, so food is much cheaper in perception.

There are several factors that may explain the perceived implausibility:

We are much richer. While Christian's and Rashad's chart is inflation adjusted it doesn't reflect the rise in real income during this period. The median family today in the U.S. is about twice as rich than in the 1950s. In other places of the world the income gain was much larger. The fraction of our income taken up by food is much lower than in the 1950s, around 40%. This is corroborated for staple food by this chart from Our World in Data.
Rising incomes combined with shrinking food prices have a non-linear impact into the economic well-being of an individual or a family. Lower incomes are used up mostly for indispensable expenses, the primary needs. There is little disposable income. There is no money to buy more food; rising prices pose an existential crisis. When incomes rise and food prices fall, basically every additional dollar is newly disposable income: Money that was locked in is now available to make choices, including choices concerning better or more delicious food.
We eat better food. "Better" as in higher quality, greater variety and higher sophistication. In Germany in the 1970s we just didn't have Balsamico vinegar, Zucchini or antipasti on our daily menus. They were not available in normal stores. Today, many out-of-season fruit are available year-round, made possible by climate controlled storage and air transport. We drink wine from all over the world. That's obviously more expensive than eating mainly seasonal vegetables in winter, making preserves from excess fruit in summer, and drinking local beer, as was customary in the 1950s.
We eat more processed food. I suppose that the data from Christian and Rashad simply looks at food expenditures and not at a specific food selection that's constant over time. In this case their data will reflect the trend to processed, ready-made and hence more expensive food. There is a documentary about the Jewish tradition of gefilte fish across three generations. The grandma describes how she manually prepares the dish, starting with a live fish; her granddaughter just opens a jar with gefilte fish balls:

One of the main reasons why I have to take gefilte fish out of a jar is: My lifestyle is so different from that of my grandmother's and my mom's that it's really a necessity.

You are combining income and substitution effects in your answer. But the OP question is about prices. The price of food in terms of the consumption basket has gone down by about 20% as indicated by @1muflon1's chart. But food is also an inferior good in developed countries. As income goes up, the share of spending on food will go down, making the food drag on the average budget a lot lower. — jpfeifer, May 19 '22 at 09:16
@jpfeifer We are not in disagreement. My answer addresses the fact that food seems to be a lot cheaper than in 1960, although it is factually only moderately cheaper. It nominally doesn't answer the question but tackled my (and maybe the OP's) puzzlement that it's only 20% although it seems more. — Peter - Reinstate Monica, May 19 '22 at 10:02

Peter - Reinstate Monica · Answer 3 · 2022-06-20T21:56:39.827

In my other answer I listed reasons why food appears cheaper than it nominally is. But the fact that the prices didn't drop more despite of huge advances in mechanization still puzzled me. Here is a take:

The mechanization in the agricultural sector is an answer to the rising cost of labor. It is not necessarily much cheaper than labor in 1955; it is much cheaper than labor today though. Places with cheap labor continue to use it and do not pursue mechanization; that is true for migrant or illegal harvest helpers in the U.S. just as for many places in the developing world.

As an example take the current (spring 2022) situation in California as reported by the New York Times (emphasis by me). The article starts with the (perhaps surprising) fact that the number of illegal immigrants in the U.S. is shrinking, and that the number of undocumented farm hands declined even faster. This has an impact on the agricultural production in California, where illegal immigrants from Mexico used to do a substantial fraction of the labor on farms:

Immigrant guest workers are unlikely to fill the labor hole on America’s farms, though. For starters, they are costlier than the largely unauthorized workers they are replacing. The adverse effect wage rate in California this year is \$17.51, well above the \$15 minimum wage that farmers must pay workers hired locally.

So farmers are also looking elsewhere. “We are living on borrowed time,” said Dave Puglia, president and chief executive of Western Growers, the lobby group for farmers in the West. “I want half the produce harvest mechanized in 10 years. There’s no other solution.”

Mechanical harvest is not cheaper than manual harvest using cheap labor (I should add: by exploiting illegal immigrants) a couple years ago. Therefore, the generated produce is not cheaper than in the past — it is cheaper though than it would be if it were harvested with the more expensive labor today.

score 0 · Answer 4 · answered May 18 '22 at 14:47

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Because most of the big innovations in most crops had already happened

The major technological advances for arable crops in industrial-scale farming are:-

Productivity per plant
Reliability of germination
Large-scale irrigation
Automation of ploughing/planting/harvesting/threshing
Weedkillers
Pesticides
Artificial fertilisers

For staple crops such as wheat, all of these innovations had already happened by 1960 and were already very mature technologies. Have there been improvements since then? Sure there have. Have any of them been order-of-magnitude game-changers? Not at all - they're only attempting to improve slightly on something which is already extremely highly optimised.

answered May 18 '22 at 14:47

Graham

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"For staple crops such as wheat, all of these innovations had already happened by 1960 and were already very mature technologies. " Maybe so, but nevertheless staple crops like wheat are much, much cheaper now in real terms, measured relative to general consumer price levels, or relative to hourly wages, than they were in 1960. See for example wheat and flour prices here: https://ourworldindata.org/food-prices#food-prices-over-the-very-long-run or USDA inflation-adjusted price indices here: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=76964 – AlabamaScholiast May 18 '22 at 15:09
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So there have in fact been dramatic improvements in production and dramatic decreases in price since the 1960s; nominal prices per unit have gone up over the same time period because those changes, while dramatic, were not large enough to overcome the prolonged and sometimes extremely rapid (e.g. ca.1960-1981) general consumer price inflation over the last 60 years. – AlabamaScholiast May 18 '22 at 15:21
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https://fred.stlouisfed.org/series/A0137GUSA254NNBR shows the productivity per acre of wheat increased roughly 1.5x between the late 1800s and 1950, while https://ourworldindata.org/crop-yields shows that per-acre wheat yields have doubled from 1960 to now. It's limited data for one crop, but it sure seems to go against the notion that agricultural innovation/productivity has plateaued since 1960. Do you have evidence to the contrary? – Nuclear Hoagie May 18 '22 at 15:39
@NuclearHoagie, productivity per acre isn't the only factor in the cost of wheat. The invention of the combine harvester did absolutely nothing to increase the per-acre productivity, but increased the per-person productivity dramatically. More generally, the development of mechanical harvesting, threshing, and milling increased the per-person productivity by approximately three orders of magnitude. – Mark May 19 '22 at 00:11
@Mark The per-person productivity might not have increased as dramatically between 1960 and today as it did between 1800 and 1960 but it did increase quite significantly, probably by more than the factor of 2 on per-acre production. You can just look a the proportion or the total number of people employed in agriculture. It has been falling for decades all over the industrialized world in spite of produced quantities increasing at the same time. – quarague May 19 '22 at 09:35

Why hasn't innovation in the agricultural industry led to a significant reduction in food prices?

4 Answers4

Because most of the big innovations in most crops had already happened