Are energy prices really fueling food prices?
The biofuels age has arrived, and as a result farmers are receiving more money these days for their grain. But it does not mean that we will see sharp spikes in food prices for renewable fuel.
Bored by reporting on record high gasoline prices, the media have turned their attention to recent small increases in food prices. In just about every story, ethanol is the culprit.
But blaming ethanol use for food inflation is wrong for three reasons.
First, the price of meat in the grocery store is not determined simply by adding feed costs to an animal. Farmers are price takers, not price makers. They buy inputs from and sell to price makers. Farmers can’t demand a certain price to cover costs and a reasonable profit. Higher feed costs may simply stop at the farm gate.
Second, much of this year’s food inflation did not come from ethanol because most grocery prices are unaffected by corn prices. However, they are affected by transportation, electricity, labor, marketing, and other costs.
The production of ethanol does not translate into less grain available for food, because farmers do not grow more or less corn based on ethanol production. Ethanol production uses field corn-most of which is fed to livestock, not humans. In fact, only the starch portion of the corn kernel is used to produce ethanol. The vitamins, minerals, proteins and fiber are converted to other products including sweeteners, corn oil and high-value livestock feed-feed which helps livestock producers add to the overall food supply.
Lastly, in food products that contain corn — including corn fed to livestock — the price of corn is a small fraction of the overall consumer price. According to Illinois Farm Bureau calculations, the farm value of corn in a 24-ounce box of corn flakes is 10 cents. A year ago, it was a nickel.
Let’s look at another example. The food value in a pound of pork was 7 cents last August when corn prices were $1.80 per bushel. The value of corn in a pound of pork at today’s price (about $3.70 per bushel) is 14 cents.
The government reported last month that the average price of center cut, bone-in pork chops was $3.23 per pound in the United States. At today’s corn prices, the farm value of the corn in that pork chop accounts for 4.3 percent of the cost. The increase in the value of corn in that pork chop due to a doubling in corn prices accounts for only 2.2 percent of its retail price.
Corn prices at the farm level have been very low since 1998. We are now returning to non-subsidized profits in corn production. This has happened before. In fact, in inflation-adjusted dollars, we have seen corn prices as high as or higher than current prices several times since the 1970s. Continued higher market prices for corn and soybeans will significantly reduce the amount of farm program payments farmers will receive from Uncle Sam in 2007 saving taxpayers roughly $2 to $3 billion dollars.
As farmers wrapped up their spring planting, it was clear that market forces were at work. Higher corn prices had prompted farmers to plant more acres of corn this year than any year since World War II. Agriculture has always adapted to the changing needs of mankind, and there is no reason why this shouldn’t be true now.
Recent innovations such as soy ink and grain-based paper have further diversified the use of agricultural commodities. Biofuels is simply the latest development.
Public investment in renewable fuels production should remain a national priority as economic benefits go well beyond the prices farmers receive. Investment and job creation in rural America will always pay greater dividends than continued purchases from economies of the world’s most unfriendly and unstable oil regimes.
If agriculture has the potential to provide both our energy and nutrition needs, then we should face this opportunity positively. We need to review agriculture’s role in the 21st century. And we need to assess how significant developments will help to meet our growing global demand for food and fuel.
Jill Frueh is the manager at the Bureau County Farm Bureau.
