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Who Gets Your Food Dollar?

March 17, 2011


Oil prices are soaring, routinely closing well in excess of $100 per barrel.  Prices for gasoline and diesel fuel continue to rise in concert with traditional spikes due to the summer driving season still to come.  And, while falling back in recent days, commodity prices for things like Number 2 yellow corn still remain high. All of these factors have pushed the retail prices of all goods consumers buy higher, including for food.  As a result, many in the industrial meat sector, along with junk food processers and other food manufacturers are once again seeking to blame ethanol for the spike in corn prices and the subsequent spike in food prices.  Do they have an argument this time around? A recently released analysis from the U.S. Department of Agriculture (USDA) seeks to answer that question.  Analyzing the components of each food dollar spent in the U.S., USDA has concluded that just 11.6 cents of each dollar makes its way back to the farm.  That is down from USDA's previous estimate of nearly 20 cents back in 2008, the last time food manufacturers and others sought to blame ethanol for rising food prices. So, if the farm value of each food dollar is actually decreasing, and corn demand and price are even smaller factors in food price determination than previously thought, what is driving American food bills higher?  The simple answer is and has been energy.  According to USDA, energy-intensive sectors are the second largest contributor to food prices – only trailing labor costs.  And, as labor costs tend to be more stable and predictable, the volatility in energy prices is driving the sticker shock Americans may be feeling at the checkout counter.  Totaling up the percentages for food processing, packaging, transportation – all energy intensive activities – and actual energy costs, nearly 33 percent of each food dollar is spent in these energy intensive areas.  If you frequently eat away from home, labor and energy costs gobble up even more of your food dollar and leave just 3.4 percent for those involved in agriculture. As many consumers likely noticed, the prices for food remained high following the commodity price spikes of 2008.  Despite the raw material and energy costs for food processors falling in the fall of 2008 and remaining in line through 2009 and much of 2010, the prices paid by consumers in the grocery store remained higher.  This "sticky price" phenomenon is not an uncommon practice.  Ever noticed that the price of gasoline rises rapidly if oil rises, yet fails to match the same pace down if oil prices fall?  So, while these companies cry wolf about the price of corn on the way up, they do nothing to adjust their prices for consumers when the price of corn falls.  If, as they contend, corn price and ethanol demand were leading contributors to food price determination, then we should see consumer prices adjust accordingly.  It's probably worth mentioning that some of the loudest critics of ethanol – industrial livestock and poultry firms like Smithfield – have been reporting higher than expected profits last quarter. No reasonable advocate for American ethanol will tell you that using corn to produce ethanol has no impact on food prices.  But, to suggest that the driving factor behind the rise in food prices is our effort to develop a domestic renewable ethanol industry is disingenuous.  A historic look at U.S. corn production and demand streams  demonstrates that virtually every bushel of corn now turned into fuel and feed by U.S. ethanol producers comes from increases in productivity not  by taking supplies away from other uses like livestock feed. Moreover, as USDA notes, the share of each food dollar spent making its way back to the farm is even lower than previously thought.  And, if you were to break it down further to individual commodities like corn or wheat, you find that 11.6 percent to be even less.  Indeed, a rough back-of-the-envelope calculation can be used to approximate the contribution of corn to the 11.6 percent figure. Corn typically represents about 15% of the total farm value of all U.S. agricultural food and feed products. Thus, it could be argued that corn's share of the food dollar is just 1.7 percent (15% of 11.6%). Admittedly, the math is rough; but it shows the almost negligible impact of corn on retail food prices.America needs balance in both its energy and agricultural policies.  We need to understand that "drill, baby, drill" is a bumper sticker, not the solution to our energy problems.  We need to respect the current budget crisis and the tax incentives and direct subsidies given to all energy and agriculture should be dispassionately discussed and thoughts as to reform offered.  And, we need to ensure that promising new technologies for both agricultural and ethanol production are allowed to flourish. The reduction in farmers' share of each dollar spent on food directly undercuts the claim that higher corn prices resulting from increased ethanol demand are driving food price hikes.  It should also give each of us pause to reflect and better understand from where the food we buy in grocery store comes.  (Here's a hint:  not from the back of the store.)