Recession or Not: The Consumer Has Reached Their Breaking Point
Whether we are in a recession or not is to be determined, but I think we all can agree that we are feeling the impacts of a looming recession. Tanner Ehmke, a leading dairy economist with CoBank, says that we are not in a recession—not quite just yet.
“We’re going to be in one, probably soon,” he says. “That's mixed news for those of us in agriculture. We want a strong consumer to buy our products. At the same time, we’re also competing for labor.”
Speaking of consumers, Ehmke says they are feeling the pinch every time they walk into the grocery store. The consumer has hit the level of how much price absorption they can take.
“We’ve hit that level,” Ehmke says. “The consumer is not going to take any more cost increase.”
The savings that the consumer was able to accumulate throughout the pandemic has dwindled thanks to higher fuel, higher rents, higher groceries and more.
“Through higher costs of everything now, those savings have been depleted,” Ehmke says. “Credit card debt is now going up. And that's an indication for a lot of people that they've run out of cash.
With all that being said, people no longer can absorb higher costs. Ehmke says that lighter foot traffic is seen in some grocery stores, while discount retailers have seen a significant increase in foot traffic.
“Even your wealthier consumers have decided that they cannot afford cost increases anymore,” he shares. “For their shopping, they're trading down from branded products to private label store brands. They're trading down from premium products to lower-priced commodity products. After they've done all of those things -- shifted retailers, shifted from brands to private label, shifted to commodity versus premium -- the next step then is for them to reduce how much volume they buy.”
Mike North, president with Ever.Ag, concurs with Ehmke and says that the looming recession is naturally top of mind for everyone. North also says that while consumers are very notably showing changes in spending, the dairy case has performed very well relative to other protein categories.
“Moreover, down trading in the food service universe can still include a lot of cheese as fine dining frequency is substituted with quick casual and delivery,” North says. “However, this may come at the expense of other fats/creams.”
Ehmke says it is going to be a balancing act between the farmers and processors going forward.
“You simply can't pass that cost on to the consumer anymore,” he says. “It's just going to compress margins.”
North says yes, the recession is a big story and advises producers to be mindful of normal seasonal demands that will taper into the new calendar year.
November 11, 2022