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A Revelation at the Wall Street Journal

September 5, 2012


Less than a month ago, the famously anti-ethanol editorial writers at the Wall Street Journal howled that the Renewable Fuel Standard (RFS) was exacerbating drought-related "corn shortages" and "driv[ing] food prices up in a way that punishes consumers around the world..." And reaching deep into their dead-and-buried-biofuel-myth grab bag, they pulled out this emotional beauty: "...biofuel mandates increase hunger and hunger-related diseases at home and abroad..." Never mind the fact that despite the drought in the U.S., this year's global grain supply will be the second-largest in recorded history (just 1.9% smaller than last year's record haul). Never mind the fact that corn has very little relevance to food prices in the least developed and most malnourished nations, where rice and wheat are primary staples. Never mind the fact that the U.N. says roughly 1.3 billion tons of food are wasted or spoiled ever year around the world (by the way, that's roughly the equivalent of last year's record global coarse grains supply). Never mind that the U.S. ethanol industry will use just 2.9% of the global grain supply this year—the lowest rate in five years. Of course, the latest ethanol-bashing editorial was given prime real estate on the popular opinion pages of the August 11 print edition of the WSJ. It also was, not surprisingly, a featured item on the WSJ web site. And, predictably, it was aggressively promoted and widely circulated by the doting Big Oil and Big Food lobbies who have become fast friends with the Journal editorial board. Yet, yesterday, inconspicuously stashed on the WSJ "Real Time Economics" blog, is a short post by Neil Shah entitled "Hard to Pass Food-Price Spikes on to Consumers." In it, Mr. Shah breaks down data from the U.S. Departments of Labor and Agriculture and concludes the impact of the drought on food prices will be "manageable" and "far from crippling for the average consumer." Mr. Shah's analysis also led him to the natural conclusion that "...corn-price spikes like the one we've experienced...don't lead to massive spikes in the overall price of food at the grocery store." One can picture the furrowed brows and wringing hands of the WSJ editorial writers upon reading Mr. Shah's piece (that is, assuming the editorial writers read anything in the WSJ aside from their own ivory tower opinion pages). "How can this be?!" they would certainly ask, exasperated and bewildered. As Mr. Shah correctly notes, "It's not that easy for different parts of the food-supply chain — from grain processors to major food firms like chicken producer Tyson Foods Inc. — to simply raise prices whenever input costs go up." But the inability of food processors to pass higher input costs onto consumers is only one factor. Another major reason that "corn-price spikes" don't translate to "massive" food price spikes is that there just isn't that much corn in retail food items. The value of corn embedded in retail grocery products makes up just a miniscule fraction of their retail price. For example, when the price of corn was $7.50/bushel (as it was at this time last year), the corn in a box of corn flakes was worth 10.7 cents. Today, with corn prices at $8/bushel, the corn in that same box of cereal is worth 11.4 cents. That's hardly "punishment" for consumers around the world. All told, the value of the agricultural ingredients in our groceries represents just 14 cents of every retail food dollar. That's why USDA is expecting food prices to increase just 3% this year and 3.5% next year—that's right in line with the 10-year annual average of 2.9% food inflation. The insight in the WSJ blog post was blatantly omitted from an article co-written by Mr. Shah and splashed across page A3 of yesterday's print edition of the WSJ with the doomsday headline, "Drought's Grip is Wide, Deep." The article that appears on the blog is undoubtedly the cutting-room floor remnants that weren't "sexy" enough for the print version of the drought story. At least a highly useful chart that accompanied the blog post survived the cut and appeared in print. The chart shows virtually no correlation between corn price movements and changes to retail food prices, and demonstrates that even major swings in corn prices have little, if any, effect on changes in retail food prices. Although we know better, wouldn't it be great if the WSJ editorial board actually took some time to sit down with the reporters in the newsroom who have actually analyzed the numbers, interviewed the experts, and reported the facts on the drought's impact on food inflation? They might just learn something.