Farmers, high commodity prices, and the biofuels industry have all received bad public relations recently from consumers and the economists who study food prices. Their analyses end up in the Washington Post, the New York Times, and on evening television news broadcasts and always paint a negative perspective from the viewpoint of Cornbelt agriculture. But is the blame really deserved?

Purdue economists Chris Hurt and Corinne Alexander say the answer is complex, involves global food and energy economics, and raises questions about where US policy should go. Their research in the Purdue Agricultural Economics Report looks at what happened to food prices in the 1970’s when commodity values were strong. At that time general inflation was 6.8% per year, and food prices were rising at 10.3% per year. During the disinflationary period of the early 1980’s the general rate of inflation was 10%, and food prices were only inflating at a 6.8% rate.

Hurt and Alexander say food prices are rising because of the farm level values of raw materials used to produce food, but unlike the 1970’s when farmers received 32% of the consumer food dollar, today’s share is 20%. They also say foods make up a smaller share of the Consumer Price Index. Compared to the 1970’s, a 40% increase in commodity prices would push up food prices by 12.8% and inflation by 2.43%. But today a 40% increase in commodity prices only results in an 8% rise in food inflation, and a modest 1.2% rise in general inflation.

Another issue that diminishes the impact of US agriculture on food prices is the global food market, and a drought in the US is not going to impact food prices as it would have 35 years ago, since the US share of crop production has diminished and the US imports more food than it did in the 1970’s.

While food inflation has been less than the general inflationary rate for the past several years, that changed in 2007 and food inflation has lead the general inflation rate. But interestingly, the higher food prices have been due to prices for fruits and vegetables, wheat products including bread, spaghetti and flour, as well as eggs.
• Fruit and vegetable prices are a function of reduced acres, a California freeze in January, a cold February in Florida, and weather damage to Mexican crops. Also the loss of honey bee colonies reduced production for many food items, but nothing there can be related to the demand surge for biofuels.
• Higher prices for bakery items are a function of tight supplies of wheat in the US and the world, poor crops in Canada and Australia, and crop damage in the Great Plains, but nothing related to biofuels.
• The higher prices for eggs are due to higher corn prices, since the farm share of the retail price of eggs is 53%, which is the highest of any food product.

Hurt and Alexander say a related study at Iowa State suggests that, “Results are for food inflation to be higher than they would have been without biofuels by 1.1 percent to 1.8 percent.” And they report a USDA study does not attempt to link food prices to biofuels, but predicts, “Food inflation in the U.S. will be three to four percent in 2007 and that is up from an annual inflation rate of 2.4 percent in 2006. Thus, this reflects an increase from 0.6 percent to 1.6 percent higher than in 2006.” The Purdue economists say that every $1 increase in commodity values is probably pushed onto consumers who have to pay an additional $1.

Compared to farm prices and consumer costs in 2005/06, the Purdue team says there will be an additional $15 billion or 1.2% increase in food prices for 2006/07, and an additional $22 billion or 1.8% for 2007/08. However, 50% of the impact on food costs is due to higher prices for meats.

Summary:
Food prices will feel some impact from biofuels over the next several years, but to a lesser magnitude than some forecasters. That is because farmer receive a much smaller share of the consumer dollar, consumer spending for food is declining compared to other consumables, and more food comes from foreign sources. Food price inflation is also the result of higher energy costs and poor weather conditions. Food inflation had been lower than the general inflation rate, but for 2007 and 2008 it is expected to surpass it. Nearly half of the food inflation rate can be attributed to livestock prices. The Purdue report suggests food will be able to successfully compete with biofuels, but prices will be higher, however that will depend on yield trends, energy costs, and biofuel production technology, as well as where US biofuels policy heads.