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Many forces contribute to rising food costs

Recent reports indicate food prices have risen more in the past few months than at any time in decades, prompting the usual complainers about U.S. farm programs to point fingers at current high commodity prices, ethanol production and their favorite target, farm subsidies, as primary contributors to more expensive groceries.

Those factors may play roles, but mostly as supporting cast. The scene-stealers are unprecedented high energy costs, labor hikes and worldwide demand for food.

Corn gets the bulk of criticism, with high prices linked to the increased use of corn to produce ethanol. A recent Texas A&M University study indicates that criticism is ill founded.

Analysts at A&M’s Agricultural and Food Policy Center (AFPC) say higher corn prices have had little effect on rising food costs. In 2007 for instance, an entire 12-pack of soda contained only 22 cents worth of corn, just a slight increase of 11 cents for the same 12-pack in 2004.

The A&M study, “The Rising Effects of Ethanol on Texas Food and Feed,” was conducted in response to the state’s livestock sector’s concern for rising feed costs and decreased profits. The report found that a waiver on the Renewable Fuels Standard (RFS) mandated by the 2008 Energy Bill would not lower corn prices for the livestock and poultry industries.

“Relaxing the RFS does not result in significantly lower corn prices,” the report states. “The ethanol industry has grown in excess of the RFS, indicating that relaxing the standard would not cause a contraction in the industry.”

David Gibson, executive director for Texas Corn Producers Board, said the livestock industry is a vital and significant player in the overall agricultural economy in Texas.

“The Texas Corn Producers Board not only represents corn growers in our state, but also many corn producers with interests in the livestock industry,” Gibson says. Ninety percent of corn produced in Texas is used for livestock feed.

“We need the livestock feeders in our state,” Gibson says. “Both the grain and livestock sectors are important to the survival of our state’s rural economy.”

As noted in the study, higher commodity prices do not reflect greater profits for grain producers because of substantially higher production costs, such as fertilizer and fuel. On average, the cost of commodity production per acre is nearly $800 in the Texas Panhandle, home to most of the state’s livestock feeders and where a high volume of the state’s corn is produced.

“Grain producers are operating at a greater risk than ever before,” Gibson says.

With rising energy costs, corn and other commodity prices would have to increase, the report explains. Higher production costs will continue to pressure acres.

The A&M report also shows that the RFS and increased ethanol production are not the cost drivers to the corn market in Texas. The underlying force driving changes in the agricultural industry and the economy as a whole, as noted in the report, is overall higher energy costs.

The report can be accessed at the AFPC Web site at

Numerous factors affect other commodities as well. As for peanuts and peanut products, the price at the grocery store is based on supply of peanuts more than anything, says Shelly Nutt, executive director, Texas Peanut Producers Board.

“Because of the drought in the Southeast, including Virginia and the Carolinas, we had a shortage of peanuts in 2007,” Nutt says.

“And it wasn’t just the drought in the Southeast that drove up the price; China has become a net importer of peanuts rather than a net exporter for the first time in history, so the shortage was felt worldwide.”

Food supplies will be pinched even further as global demand continues to rise. “With increasing populations globally, less farmland will be available to grow enough food to feed the world. It will take more and more inputs to get the yields necessary to feed the rising population.”

She says the cost of producing peanuts is “skyrocketing because of high fuel, fertilizer and labor costs. Those same high fuel and labor costs also are driving up the costs for shelling and manufacturing peanut products.

“We’re in a vicious cycle and I don’t see it being broken any time soon.”

Tim Lust, executive director, National Grain Sorghum Producers, says a lot more than meets the eye influences food and livestock feed prices.

“The agriculture sector finds itself in a ‘perfect storm’ of market factors,” Lust says. “Index fund investments in the futures market, adverse international weather, and the low U.S. dollar value, along with increased domestic and worldwide demand, have put agriculture in uncharted territory.

“It is becoming extremely difficult for our customers — both livestock and ethanol — to make a profit,” he says. “At the same time, huge increases in cost of production for grain producers, driven by record oil prices, require that grain prices remain high in order for producers to make a profit.”

He says the recent A&M report sheds some light on the dilemma and “indicates several factors that have a more significant impact on the price of food than the actual commodity cost. The cost of post-farm labor accounts for more than 38 percent of each dollar spent on food. There is a bigger picture here; we have to acknowledge that agriculture is not ‘an island’ in the prevailing world economy.”

Renewable fuel advocates also take umbrage at criticism that ethanol production is the major contributor to higher food costs.

Information from Renewable Fuels Now suggests a lack of perspective. A recent report indicates the “impact of biofuel production pales in comparison to factors like the price of oil.” Consider some historical context:

In 1949, the price of corn averaged $1.24 per bushel. Recently corn futures were going for $6.13 per bushel on the commodities market.

That’s an increase of 394 percent in 59 years.

Now compare that to oil.

In 1949, oil averaged $2.54 per barrel. At the same time corn futures hit $6.13 oil was going for $113.70 per barrel.

That’s an increase of 4,376 percent in the same 59 years.

Petroleum products figure prominently in the price of food — for agricultural production, packaging and transportation.

Toni Nuernberg, executive director of the Ethanol Promotion and Information Council (EPIC), in a response to an article on rising food prices, said ethanol is part of the solution, not the problem.

“ Food production in the United States is not being reduced to produce ethanol, which is just one point of demand for America’s corn crop. Drought, population growth, growing protein demand in developing countries, war, transportation costs, crop acreage shifts and many other factors affect food prices and supplies.”

He said ethanol does not take food from the mouths of starving people. “Ethanol production uses field corn, most of which is fed to livestock with only a small percentage going into cereals and snacks. In fact, only the starch portion of the corn kernel is used to produce ethanol. The vitamins, minerals, proteins and fiber are converted to other products including sweeteners, corn oil and high-value livestock feed.

He said research into advancing technologies will improve production of cellulosic ethanol from feedstocks other than grains, including switchgrass, crop waste and other renewable biomass.

“Rising energy costs are directly related to our food bills, as U.S. growers fuel tractors and machinery, and truckers transport foodstuffs to market. And the impact of fuel prices on food costs underscores the need for energy independence in the United States. Rather than pinning our economic woes on ethanol, we should look to it as the jumpstart of our energy independence. It’s a homegrown piece of the puzzle — one that is reviving rural America and is better for the environment. It should not be a convenient scapegoat for global issues beyond our control.’

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