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Experts Differ on Food Inflation 04/11/08 5:16:53 PM
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Prices Have Larger Effect on Products Requiring Less Processing
By Todd Neeley
DTN Staff Reporter
OMAHA (DTN) -- The effect high corn prices have on the price of food is one of the most hotly debated issues resulting from the recent ethanol boom.
Recent headlines have chronicled the struggles livestock, poultry and dairy producers have had with high corn prices. Some say this is only the beginning, while others say blaming corn for increased food prices oversimplifies a complex problem.
Thomas Elam, president of FarmEcon LLC based in Indiana, said food prices have only started to increase as a result of higher corn prices. "Poultry is almost there today," he said. "Turkey and egg producers have about increased prices in line with feed costs. Broiler producers have increased prices, but still have a ways to go -- they are about 75 percent of the way back to normal profits. Hogs and cattle prices have not even started to adjust.
"As of today we are losing $40 a head on every pig and $200 a head on every fed steer or heifer. Hogs will take another 18 to 24 months, beef at least that long, to fully adjust. But that assumes status quo on ethanol prices."
But Miquel Carriquiry, a research associate at the Center for Agricultural and Rural Development at Iowa State University (CARD), said the issue of increased food prices is far more complicated than pointing a finger at one commodity.
"Corn is at the base of many different types of food," he said. "Hence, increasing the price of corn will put pressure on the price of food."
In highly processed food, for example, corn is a minor component of the final product and accounts for about 2 cents of the retail cost of a box of cereal. So an increase in the price of corn alone should have a minor effect on the price of the product, he said.
"However, the relative impact will be bigger for products with minimal processing," Carriquiry said. "In short, there are several factors behind the food price increases outpacing the overall inflation, and assessing the impact of each of them in isolation is complicated."
Food prices have been increasing at a rate that is higher than overall inflation, he said, and "Ethanol is partly responsible for that since it is a new and growing source of demand for corn," he said.
However, Carriquiry said energy prices -- especially crude oil -- and some supply disruptions need to be taken into consideration as well.
"The price of energy is very important as it does both increase the cost of producing, transporting and processing crops, and also results in higher ethanol demand, which, in turn, increases the demand for corn leading to a raise in corn prices," he said.
In addition, Carriquiry said the growing demand for proteins -- and in particular animal proteins from Asia -- is another key factor driving up food prices.
Labor costs are also having an effect: A 2008 Federal Reserve Bank of Kansas City report said labor now accounts for nearly 39 percent of the total food marketing bill compared to about 28 percent in the 1970s.
Further, there is a close correlation between energy prices and retail food prices, according to the report, with estimates that a 10 percent increase in energy prices can contribute about 5 percent to an increase in retail food prices.
Marketing costs (the difference between the farm value and consumer spending for food at grocery stores and restaurants) have risen sharply since 1950, the report said. In 1950, marketing costs accounted for 59 percent of total retail food costs. During the past three decades increasing labor and energy costs have boosted that share steadily, from 67 percent in the 1970s to 80 percent today.
When it comes to the change in corn price, a 2007 CARD study estimated that for every 30 percent increase in the price of corn, retail food prices increased by only about 1 percent.
A FarmEcon LLC study published last month paints a different picture in light of expected higher ethanol-production mandates. The new Renewable Fuel Standard recently passed by Congress could create additional pressure on food prices, the study said, because the RFS mandates increased production even in times of crop disaster.
The new 36-billion-gallon Renewable Fuel Standard caps corn-based ethanol production at 15 billion gallons.
"Unless the EPA and USDA agree to reduce the RFS in a short-crop year, a higher price of feedstocks would need to choke off enough feed use, food use and exports to make the RFS mandate possible," the study concluded.
The study said that the feedstock price effects of biofuels policy can "severely distort crop production decisions and other crop prices. Crops supplying biofuels feedstocks with high policy support levels will have increased acreage; other crops will have less land available. All crops affected by lower acreage will see increased prices, even though they may not be used for biofuel production."
The notion that higher feed costs for livestock and dairy producers leads to higher food prices, runs counter to what a Food and Water Watch study found last year.
The study cites several examples of how the price of meat, poultry and milk didn't respond to changes in the farm-gate price of corn.
In particular, the study found that from November 1994 to July 1996, the farm-gate price of corn more than doubled because corn acreage and yield fell between 1995 and 1996, yet the price of ground beef, pork chops and whole chicken rose moderately or declined.
The farm-gate price of corn jumped from $1.99 to $4.43 during this period. However, the price of ground beef declined from about $1.83 to $1.80 per pound and the price of pork chops and whole chicken rose by about 7 percent.
So during this time, the farm gate price of corn increased more than 17 times faster than the price of pork or chicken. The study cites several other similar examples of when this disconnect has occurred.
Terry Francl, a senior economist with the American Farm Bureau Federation, said there is yet another potentially overlooked factor driving up food prices -- a higher minimum wage that took effect July 24, 2007.
He said a May 2000 USDA study found that "a simulated" 50 cent increase in the 1992 minimum wage increased wholesale food prices by about one-third percentage point and consumer prices by slightly less.
In July 2007 the minimum wage was increased 70 cents from $5.15 to $5.85.
Francl said this would suggest that the latest minimum-wage increase has led to a 0.5-percent increase in food prices. He said further minimum-wage pressure on food prices can be expected as a result of minimum-wage increases to $6.55 in 2008 and $7.25 in 2009.
In addition, he said commodity funds have made food prices more volatile as prices have moved up and down the scale as investors move in and out of the market -- especially when it comes to futures markets.
What's more, world food supplies have been hurt by years of drought in Australia, Europe and parts of Africa, leading to a shortage in wheat that has in effect contributed to higher food prices.
Todd Neeley can be reached at todd.neeley@dtn.com.
(SK)
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