Ben Laine is the senior dairy analyst for Terrain, a team of economists who provide expert analysis to the customers of participating Farm Credit Associations.

With milk production staying within a narrow range of little change, demand for dairy products is the main driver for price changes. Levels of consumer spending on food at home compared with spending on food away from home have implications for dairy markets because people consume more dairy products when dining out or ordering takeout than when they prepare their own food.

Because of price inflation, higher spending doesn’t equate to more product being consumed, but it does factor into how much product consumers can afford. Next year, prices for food away from home should rise faster than prices for food at home, but with some price relief on dairy products at the grocery store, consumers should be willing to buy at a greater volume.

More expensive, more quickly

According to the USDA Economic Research Service, the share of consumer expenditures on food has been converging over time from around 40% away from home and nearly 60% at home to around an even 50% split in 2017. The pandemic disrupted this trend in recent years, but 2022 saw a return to about 50% for each.

The distinction between “at home” and “away from home” relates to where the food was prepared rather than where it is ultimately eaten. So, importantly for dairy, getting a pizza delivered to your house for dinner counts as food away from home.

Away-from-home food spending began accelerating more quickly than at-home food spending around 2009. Some of this was part of the ongoing shift in consumer behavior, but much of it can be attributed to the fact that the price of food away from home was rising at a faster rate than the price of food at the grocery store. So, it’s not necessarily that we’re making less food at home and spending more on food away from home, though that’s part of it. The food we don’t make ourselves is getting more expensive more quickly.

It’s not the cost of the food itself, which would tend to impact both restaurants as well as consumers buying ingredients to prepare a meal at home. Food production from the farm level through manufacturing has seen impressive technological leaps that have improved efficiency and often reduced labor expenses.

Restaurants, meanwhile, continue to face rising labor costs with no easy way to replace the humans that prepare and serve the food.

No price relief at restaurants

Looking ahead to 2024, USDA predicts that overall food prices will climb 2.1%. That’s slightly below the long-term average but comes in the wake of a couple of high-inflation years. Prices for food prepared at home are expected to rise by only 1% while the price of food away from home is predicted to jump by 4.4%. Even if the amount of food in each channel holds steady, the trend of a greater share of spending devoted to food away from home is likely to continue.

If those higher restaurant bills start driving consumers back home to prepare their own food, they should see some downward direction in dairy prices at the grocery store. Aside from eggs (whose prices are expected to fall by 14.5%), dairy is the only other category expected to see its prices decline, by a very modest 0.6%, according to USDA. Hopefully that’s enough to keep consumers’ demand strong without needing to pull down prices at the farm.

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(c) Hoard's Dairyman Intel 2023
November 16, 2023
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