Country Corner
By Steve Farichild
Normal supply and demand affects food prices; it isn’t all biofuels
The U.S. consumer has grown accustomed to cheap food. With just a summer’s worth of tight grain supplies, there is a palpable unrest among the chattering classes. This chatter about food prices threatens to spill into a public snit.
Market forces are complex, but we’ve been trained over the years to assign a causal relationship to everything, and especially to things we don’t like. Something is to blame. This year it’s ethanol. It’s the devil’s favored fuel you know, recently alleged to be more of a pollutant than good old wholesome fossil fuels. Filling up your SUV with ethanol, according to a story I saw in Foreign Affairs, will suck up enough calories to feed a person for a year.
Recall that just a year ago ethanol was the great gold hope against an addiction to oil. But now we have Big Ethanol.
What’s with this sudden Jekyll and Hyde switch? To start with, milk nipped up toward $4 per gallon this summer. When consumers get slapped with price spikes, they want to know why.
Enter misleading reports from mass media—a herd animal that will ride a horse the wrong way until it dies and then beat it for a while to see if a conspiracy can be augured from the carcass.
Remember the corn riots in Mexico? Obviously, we were told by reporters, it was a reaction to U.S. ethanol policy. Never mind the fact that ethanol’s No. 2 yellow corn probably isn’t making its way into many tortillas. And never mind the fact that speculation and hoarding had something to do with the short market for food-grade corn in Mexico.
According to Purdue economists Chris Hurt and Corinne Alexander, food prices are up due to a rise in farm-level values of raw materials. But they also point out that until recently, food price inflation has lagged behind general inflation. Moreover for the year ending in August, price increases in food were led by three categories: fruits, vegetables and wheat products–hardly notorious, any of them, for being ethanol crops.
The Purdue economists said, “The cause of these price increases differs for each category. In the case of fruits and vegetables (typically the food category with the most volatile prices), price increases are the result of lower planted acreage, a January freeze in California, a cold wet February in Florida and early spring weather damage in Mexico. In addition, honeybee colonies are threatened, which may result in inadequate pollination for fruit and nut trees and vegetables.”
In other words, there are a few supply and demand factors in the grocery cart that can’t be pinned on biofuels.
In the case of wheat, 2006 was a poor crop year worldwide. The 2007 crop had planting and harvest setbacks in the United States. Australia is dry.
A study by the Center for Agricultural and Rural Development at Iowa State projects that a 30 percent rise in the price of corn and similar jumps in soybeans and wheat would result in milk prices rising by 2.7 percent. Under that scenario, CARD projects the general cost for food at home would increase by 1.1 percent.
It’s true the Purdue report ends by saying that biofuels will have some effect on food prices. However, such effects will be dampened by the fact that the farm share of retail is lower than ever, and the U.S. increasingly sources its food from foreign markets.
We can’t expect biofuels to reap a huge swath of U.S. grain supplies without having some effect on food prices, especially in the meat sector, but we should work to see that the phenomena is explained more rationally. It might just fend off the coming popular revolt against farmers.
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