Friday, April 4, 2008

President's Corner

Why Food Prices Are Increasing

By Frank Priestley, Idaho Farm Bureau Federation, President

It’s no secret that your dollar doesn’t stretch as far at the grocery store today as it did in the recent past. American Farm Bureau Federation Market Basket Survey results show an increase of $3.42 in the total price of 16 basic grocery items during the first quarter of 2008, as compared to the last quarter of 2007.

But understanding the “how” and “why” behind this trend is fairly complex. A booming ethanol industry that has contributed to higher corn prices seems to get a lion’s share of the blame. While ethanol production has decreased our nation’s dependence on foreign oil, it has also increased demand for corn, which in turn increased the price of corn and the other grains followed suit.

But in spite of the fact that about 15 percent of the U.S. corn crop is now being channeled through ethanol plants and that amount is expected to increase to 30 percent by 2010, the amount of corn available to support the U.S. food supply hasn’t changed. According to the USDA’s Economic Research Service, U.S. - produced corn typically accounts for 60 to 70 percent of world corn exports. And that percentage is dropping. In simpler terms, we produce a heck of a lot more corn than we can use here. We are not running out of corn but we are exporting less.

With regard to wheat, a drought in Australia, one of the world’s leading wheat exporting countries, the low value of the U.S. dollar in comparison to other world currencies, and the fact that consumers worldwide are currently consuming more wheat than is being produced are also factors that have increased demand for U.S. wheat, pushing prices to record highs and stocks lower than they have been in over 20 years.

Consumers should understand that if the price of grains had not changed in the past two years, food prices are likely to be close to where they are today anyway. And on top of that we would be in the midst of a farm crisis like never before. Here’s why: Energy costs including crude oil, diesel fuel, electricity and natural gas are up significantly. Natural gas is used to make fertilizer and fertilizer costs have doubled in the last three years.

Another important thing to remember about the agriculture sector, as history suggests, is that the bottom has been known to fall out of commodities markets overnight, and the energy sector won’t necessarily follow suit. If that scenario were to play out today, farmers would be stuck with impossibly high production costs and no hope to recoup those costs at harvest time.
To sum up this point, understand that the cost of everything used to produce and transport your bread, eggs, milk etc. to the store, has gone up a bunch in the last two years and if grain prices had not matched that increase, our farms would not be able to make ends meet today.

To further illustrate this point consider the fact that the cost of a 5-pound bag of flour has increased by 69 cents to $2.39, AFBF nationwide average, over the past six months, or up to a cost of about 48 cents per pound. Yet the cost of the wheat used to make that flour at today’s price is between six and seven cents per pound. Many other raw commodities compare similarly. For instance, the rough break even price to produce Idaho potatoes is six cents per pound, but the grocery store price typically ranges from 39 to 69 cents per pound. We are not insinuating that food retailers and manufacturers are gouging consumers; they have to make a profit to stay in business. The point we are trying to drive home is that packaging and transportation of food products requires materials and energy, and the cost of all of those things is up. Blaming ethanol for rising food prices is a simplistic way to look at a complex issue.

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