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There has been much discussion about the contribution of increased ethanol and bio-fuel production to the recent rise in global food prices, which have sparked riots abroad and threaten to reverse the progress towards ending world hunger. While there are clearly connections between the developed world’s demand for these fuels and global food prices, there are other significant factors at work including, higher energy costs, increased global demand and water shortages abroad. However, as C. Ford Runge, an economist at the University of Minnesota told the N.Y. Times, “Ethanol is the one thing we [The U.S. Government] can do something about. It’s about the only lever we have to pull, but none of the politicians have the courage to pull the lever.” The inconvenient truth is that when Oil is $116/barrel, it is economics and political lobbies, not the environment, that are driving developed countries, like the U.S., to divert a 1/5th of their corn harvest towards inefficient ethanol production. Ironically, the effects of higher food prices disproportionately felt abroad, have been blunted at home by the nature of American consumerism, which provides a “branded” cushion between the farm and the single-sized products (and prices) that we see at the grocery store.
The Fuel-Food Price Connection
The global prices of corn, soybeans, wheat and rice are all interconnected (see graph below) – they create the base of a dynamic food pyramid upon which prices of all food staples that lie above (meat, poultry, pork, farmed fish, dairy and egg products) are dependent. Trade policies, domestic subsidies & taxes and numerous other factors distort these connections, but basically, when corn prices double in the United States (the largest grain exporter in the world) due in part to increased demand for ethanol, other food prices around the world shudder.
Corn, Soybean and Wheat Prices (last 10 years)
Other Factors Contributing to Food Price Increases
The mandates in Europe and the United States for increased mixes of ethanol and bio-fuels in transportation fuels and a $.51 U.S. subsidy for ethanol production have helped drive up the prices for corn and soy beans, which in turn have helped push other food prices upward. However, there are also other important factors driving up prices that cannot be neglected:
- Increased demand for meat in the developing world, most notably China, where a greater substitution of grain for meat has meant 700 grain-based calories are being used to generate 100 beef-based calories.
- Water shortages abroad (most notably Australia, historically the second largest exporter of wheat) has meant less grain harvested and traded.
- Increased costs of oil and energy which has contributed to increased fertilizer, farming and transportation costs.
- The steady depletion of global grain stocks (the carryover stocks from the years before), which usually helps alleviate shortfalls.
Ironically American Consumerism Has Blunted the Domestic Blow
While food prices have doubled in various places throughout the developing world, the average bundle of groceries in the U.S. increased only 5% in 2007 (though milk and eggs have increased 29% and 36% , respectively) – It is important to note that these are record increases, and for many Americans on the margins, backbreaking and bank-breaking. Still, the discrepancy between skyrocketing global commodity prices and the smaller relative increases in U.S. stores is important and deserves explanation.
Only a portion of the prices we see at the grocery store (varying on the type of product) are dictated by cost of a product’s actual raw ingredients. In fact, “farm value” of the commodity raw materials accounts for only 1/5th of total food costs in the U.S. (down from 2/5th’s in the 1970’s), while processing, packaging, marketing/branding, transportation and warehousing account for the rest. Ironically, it is the “soft” value of products and the nature of our advertising-based consumerism that has protected Americans from feeling the full force of these global price increases. It is in part the money spent on marketing those leprechauns and bunnies, which has provided distance from farm to shelf and some cushion to soften the blow. If not for that, Americans would be asking a lot more questions about the connections between ethanol and food prices and wondering about the box of $10 cereal they just pumped into their tank.
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