So How Much Are Biofuels Really Feeding the Rise in Food Prices?

July 7, 2008 07:00 PM
 
via a special arrangement with Informa Economics, Inc.

 

Another look at what goes into food prices


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


Factors that are affecting food prices. This is one of those topics that seemingly has a different answer depending on who you talk to. The following is another analysis of the situation, this from Brent Searle with the Oregon Department of Agriculture. His look at the situation focuses on the following:

More than biofuels. A growing middle class in Latin America and Asia that can afford more meat and milk, which has driven up demand for grain to feed cattle and hogs is one of the key factors identified by Searle, along with a drought in Australia in 2006 and 2007 reduced the supply of milk and wheat available for export.

"Low worldwide wheat prices the past several years have led growers to plant less wheat; additionally, grain traders store less wheat today with 'just-in-time' deliveries," Searle noted, "and there are no current government incentives for farmers to store wheat on farm. All this has led to record low wheat stocks, causing wheat prices to soar."

Besides wheat, he points out that regional pests, diseases, freezes, droughts, floods and other natural disasters all impacted fresh fruits, vegetables, and other produce availability and price.

Labor and energy. "Increases in labor costs, as state and federal minimum wages ratchet up, from farm to processing and the restaurant, affect food prices," Searle observes. "Forty percent of the retail food price is related to labor costs after food leaves the farm." Plus, Searle points out that energy costs are also adding costs to "all aspects of the food chain."

The decline in the value of the U.S. dollar "creates greater demand for U.S. ag exports," Searle says, adding that it makes imported food more costly, too. "Approximately 30% of fruits and vegetables consumed in the U.S. are imported," he points out.

Profits and costs. Searle labels corporate profits "an excuse to hike prices." He details that Kroger Foods reported 4th quarter 2007 sales up 10% and profits up 18%. Kroger stated it paid 3% more for products. "In our view, periods of moderate inflation is a positive for our business because inflation tends to improve sales.”- - VP Rodney McMullen, Jan. 2008. Safeway reported sales up 3%, profits up 12%.

Marginal impacts from Ethanol demand for corn (U.S.) and sugarcane (Brazil). That's the conclusion that Searle reaches in his examination. "There isn't a single study that has sorted out all these factors on total food price increases," he adds. "However, several studies document that increases in petroleum price prices have had 2-3X the impact on food prices as ethanol demand for corn."

From best available data, Searle says the 4-5% food price increase in 2007 can be chalked up to:

  • 0.2% - 0.3% due to ethanol use of corn
  • 0.8% - 1% due to gasoline/fuel price increases
  • 3.5 - 4 % due to other causes

PERSPECTIVE: 2007 average increases (annualized for last 6 months of year)

  • Housing………………….2.8%
  • Food……………………..4.5%
  • Utilities…………………..5.4% (electricity and gas)
  • Education……………….5.6%
  • Motor fuel……………….6.1% (this data from before current record high prices).
  • Medical care/hospital….8.8%
  • Home heating fuel…….50.0%

2001 through 2007…

  • % increase in basket of food for family of four: 11%
  • % increase in average price of a home: 36%
  • % increase in gallon of gasoline: 96%
  • % increase per lb. for coffee 363%

Food price mix will vary by purchasing choices of consumers. The price of fruits and vegetables is climbing faster than inflation, while junk food is actually becoming cheaper, Searle comments.

"The average price of the lowest-calorie, nutrient-rich foods -- including green vegetables, tomatoes and berries -- increased by almost 20 percent over 2 years," Searle details. "In contrast, in the same time period there was a 2-percent dip in the cost of the most calorie-laden fare, such as butter, potato chips, cookies and candy bars."

Farm price impact on retail prices. Searle believes the "impact of farm gate commodity prices on final retail prices is dampened by the fact that 80% of the retail grocery cost (averaged across all products) is added after the food leaves the farm. It approaches 95% for grains like corn and wheat."

Additional perspective: A standard box of corn flakes contains approximately 10 ounces of corn. Even when corn is priced at $4 per bushel, a box of corn flakes contains less than a nickel's worth of corn. A can of soda contains less than 2 cents worth of corn sweetener.

Here's a graphic look at that food dollar:

Comments: I'm well aware of the old adage that you can make statistics say what you want them too. But Searle has presented what I think is a balanced and unbiased view of what all goes into the price of food that consumers have shell out their hard-earned dollars for. He reinforces a view that many point out in this situation: Energy and other costs are having a far-greater role in terms of pushing up food prices than the use of corn to produce ethanol. Particularly those "other costs" are significant as Searle outlines.

He also points out the double-edged sword that is the weaker U.S. dollar. Yes, it does make our exports to other countries more attractive and that has fueled demand for U.S. corn, soybeans and other commodities. But that same weaker dollar raises the price of imported foods. His finding that 30% of food we buy is imported goes to underscore another factor that is often overlooked when folks talk about food prices.

Bottom line: These are another set of facts and figures that go toward trying to explain what's behind -- and perhaps more importantly -- and what's not behind the rise in food prices as folks in this whacky town continue on their "search for the guilty" and how to address the situation.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


 

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