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There's more to high food costs than corn prices

A recent Associated Press article had this to say about the terrible flooding in the Midwest: “Floods that have inundated the Midwest could reduce world corn supplies and drive food prices higher at a time when Americans are already stretching their grocery budgets and people in poor countries have rioted over rising food costs.”

Not to downplay the seriousness of the flooding, but exactly what is the big deal about its impact on food prices? If U.S. corn acres are reduced by a million or so acres, prices might go up, what, 50 cents a bushel? What would 50 cents a bushel do that the $5 per bushel increase over the last couple of years hasn’t done already? Geesh!

It’s also annoying that the reporter didn’t skip a beat when making the connection between high corn prices and high food prices. In his mind, it’s a given. But in my mind, there’s a whole lot more going on between Point A and Point B than people are willing to hear.

For one, there are many, many factors contributing to high food prices that are not correlated with high commodity prices. There are high fuel costs required to transport commodities from the field to end users and high energy costs for processing commodities into food, etc. And who do you think has to pay actor Sam Elliot to say, “Beef, it’s what’s for dinner.” That’s right, it’s the consumer.

Secondly, while high commodity prices do have some impact on higher food prices, it’s not such a clear cause and effect.

The news media “wants to focus on the high cost of food. They say the high cost of food is due to corn going into ethanol. And it just goes on from there. Then they say we’re going to pay more for hamburgers and eggs because the price of corn is higher,” says Chuck Danehower, Extension area specialist, farm management, at the University of Tennessee.

There is a relationship there, Danehower says, but it’s not as direct as everybody thinks. “The impression they try to portray is that the cattleman is going to have to pay more for his feed, so he’s going to charge more when he sells his calves.”

But the fact is that the rancher can’t pass on the high cost of his corn purchase to the consumer any more than the farmer can pass on the high cost of fertilizer to the rancher.

“What happens is that livestock producers go out of business because costs are too high, which cuts supply, which makes the price go up.”

Conversely, when prices rise, livestock producers get back into the business and profit margins improve. But the story is not told like that.

Another factor to consider is that high prices in the futures markets don’t always translate into more money added to the grower’s bottom line. For example, despite high wheat prices, I’m hearing that many farmers locked in winter wheat in the $5 or $6 range, only to have their cash price reduced by a $2 negative basis. Now they’re selling wheat at pre-ethanol boom price levels. Somehow I don’t think the price of a pastry is going down because of it.


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