Ask Farm Aid | March 6, 2008

Does corn and ethanol effect my food prices?

March 2008

Dear Laura,
I seem to be spending more and more at the grocery store these days. Is it true that corn prices and ethanol are making my food cost more?
Brenda Bates
Kansas City, MO

Hi Brenda,
You are so right to bring up this question! It really has been the subject of headlines lately. According to US government figures released earlier in March, grocery costs increased 5.1% over the past twelve months–nearly two times the typical annual increase and much faster than the overall rise in inflation. And according to predictions, prices are expected to surge another 4% in 2008. We are certainly paying more for our food these days but your question is: Why?

Ethanol is part of the equation but certainly not the whole story but before I gear up here, I have to preface this answer with the following statement: The cost of our food is a classic case of how our food system is overly complex, leading to confusing, intertwined and sometimes nonsensical trends. I swear, I am not just saying this because it was a tough question to research and answer succinctly. In trying to answer your question, I’ve had to look at pricing indices, trade regulations, weather patterns, corporate mergers…essentially every single part of our current, wacky food system. Okay, let’s roll!

Perhaps one of the biggest causes of the rise in food costs is the cost of oil. I think you’d agree that the rise in cost of fuel has tightened all of our budgets this year. No one feels this more than the farmers who cultivate their fields using heavy machinery, mix petroleum-based fertilizer, heat greenhouses through the winter, heat and cool livestock barns and often spend several days a week making deliveries or getting to market. When gas prices go up, the cost of production goes up dramatically. Farmers aren’t the only ones feeling the pain of higher fuel costs, however. We feel it at the grocery store too—many of our fresh food items are imported or transported cross-country and it simply costs more to get them shipped from wherever they come.

No one is happy with the cost of fuel these days–not to mention the environmental impact of burning fossil fuels–and alternative energy research and production are hot right now. One of those alternatives is ethanol, a fuel made from corn. Whether or not ethanol is the best solution is hotly debated (and this is another column so I will exercise restraint and not go off on a tangent!), but there have been major pushes in ethanol production as an alternative to oil. The direct results of the ethanol boom have been two-fold: The demand for corn forced the price up 134% to an average of $3.40/bushel in 2007 AND in the same year 15.3 million agricultural acres were shifted into corn production. Right now, we are producing the same amount of corn that we were in 1944 when we were helping to feed Europe during World War II.

Last year, 19% of the harvested corn crop was used for ethanol production, taking it out of the food supply. But that doesn’t just mean that you pay more for corn at the grocery store. Only about 10% of US corn is used for human consumption; the bulk of it is generally used for animal feed. So ethanol production has led to less corn for animal feed, which means that farmers have to pay more to feed their animals, a cost that gets passed on to consumers. Additionally, production falls as producers face higher feed costs, which, again, causes the price of chicken, pork, beef, eggs, and dairy to rise. (Yet another separate column: Since corn has been put into almost every processed food item, mostly in the form of High Fructose Corn Syrup, you’ve seen the price of those items rise too!)

The other implication of ethanol is that the cost of other food items, like cereals and grains, are rising because farmers are planting more corn and less wheat and soy. At the same time, developing countries are consuming more and more wheat, corn, and soy (much of which comes from the U.S., especially now when the value of the dollar is so low). Add to this the droughts and erratic weather that have reduced the “global inventory” of grain supplies, particularly wheat, and we’ve got a classic supply and demand scenario.

If it costs more to grow the food, and there is high demand, it only makes sense that the prices are higher. Right? Indulge me for a sec to take this one step deeper into our analysis. Let’s start with the price of corn. Folks, at least in our world, can’t stop talking about $4 corn. For many farmers, it’s the first time in a long time they are actually getting paid more than the cost of production (again, another column). But if we a take step back from the excitement, and take inflation into account, the price of corn has actually been declining for the past thirty years. I found some excellent data in Food and Water Watch’s recent paper “Retail Realities: Corn Prices Do Not Drive Grocery Inflation.” The article states that farm gate prices of corn between 1980 and 1984 averaged around $6 bushel (taking inflation into account) whereas our prices today peak around $4. In the meantime, consumer goods, input costs and the cost of production have enjoyed a steady increase over that same time period. So if inflation-adjusted corn prices are declining (in spite of the cost of production increasing), why does our food cost more?

The article above, which I highly recommend (if data is at all interesting to you) takes us through four studies of consumer prices compared to crop prices. The conclusion: When crop prices are low, consumer prices generally stay the same or increase slightly; when crop prices are high, consumer prices rise noticeably. I have to say, the first time I read this (and the second and third) it was really hard to stomach. Over the long run, farmers are making less and we are paying more. Why (and who is profiting?)!?

As you probably know, our food is controlled by a handful of very wealthy companies. Four beef packers control 84% of the beef market, four pork packers control 66% of the pork market, four broiler processors control 59% of the chicken market, four wet corn millers control almost 69% of their market and four breakfast cereal companies control 78% of the wheat market. Notice a trend? With this kind of consolidation, farmers don’t set their own prices–they take what they can get from the one or two buyers in their area. These same companies lobby for farm policy that drives over-production of crops to keep prices low and counts on subsidies (instead of a fair price to the farmer) to keep farmers on the land growing cheap product for them.

In turn, a climate of high energy costs and high demand for raw materials makes it much easier to hike prices in the grocery store. Don’t get me wrong, it does cost more to produce food today and I firmly believe that we should be paying our farmers a fair price for the food that they grow. However, when you see that a farmer’s share of our food dollars has gone down 16% between 1984 and 2000 while food prices have been steadily rising, I get a little fired up! So where are our food dollars going if not to the farmer? Packaging, marketing and transportation have taken on a significantly larger significance in the division of our food dollars than a fair price to farmers. When we shop at the grocery store, in large part, this is a good bulk of our food dollars go and this is why our food costs more today than it did 20 years ago.

So, what to do with this heavy bit of information? As always, looking at numbers like these reminds me that buying direct from family farmers, even when prices are high, just makes me feel better about where my money is going. I wrote an article a while back about buying locally on a budget that I think still applies here.

At the grocery store I try to buy from companies that I know pay a premium price to their farmers. Sometimes, this means paying a little more or choosing between buying more or buying better. It’s not perfect; our food industrial food system is confusing and there isn’t always a perfect choice, but taking a little time to weigh the pros and cons of each item will at least make you feel a little better about where your dollars are going.

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