Rising Food Prices Part I: A Farmer’s Point of View

Image via Wikipedia

First in a series on rising food prices.

By Julie Murphree, Arizona Farm Bureau

I know how to keep food prices down: Tap the tundra (and more of the Gulf). Of course, the environmentalists will attack my bumper sticker phrase as heartless and posit that I have no thought for the greater good.

But I do.

I want to keep food prices at an economically viable level for Americans and the world as it has been for the last 50 years. Studies in agricultural productivity show that for the U.S., in 1950 twenty-five percent of disposable income was spent on food; today that share averages 10 to 12 percent for the typical American family. Productivity gains in agriculture are the main reason for this improvement.

But farmers and ranchers can only make so many advances on productivity. When oil prices keep inching up, our food prices go up. A rising tide floats all boats and rising oil prices raise all food commodity prices. Don’t believe me? Do an historical comparison of oil price rises to food commodity rises. You’ll see the parallel.

Two of my favorite economists confirm my concerns.

American Farm Bureau Federation Chief Economist Bob Young says supply and demand are not the only factors driving high corn prices. A major cause is higher oil prices.

“You can really trace it all back to what’s going on in the oil markets, and that oil is at $100 [per barrel] as opposed to $40 [per barrel]. As energy costs have gone up, that’s going to drag with it everything else in the system,” Young said.

Young expects retail food prices to rise 3 percent to 5 percent throughout the next year. Young sees higher costs for farmers and ranchers too.

“Farmers are paying higher prices for inputs [their costs to produce] too,” Young explained. “Think about the livestock folks. They’re paying a higher price for their feed. The guy who is growing that corn is paying a higher price for his fertilizer and for his seed. The same fuel prices that everyone else is paying, that’s what farmers have to pay too.”

Eric Wilkey, president of Arizona Grain who regularly studies the market reminds us that everything we produce takes energy: Energy to grow it; energy to package it; energy to transport it; even energy to eat it.

“These energy impacts are real,” says Wilkey. “The underlying commodity price for wheat, whether it runs $6 a bushel or $10 a bushel, for example, does not significantly impact the price of a loaf of bread as much as most would expect. Because when you break down the actual amount of wheat in one loaf of bread the wheat is only 9 to 15 cents a loaf.

“But fuel prices are in everything,” he adds. “You must price in the cost of diesel fuel that goes into the farmer’s tractor that plants and harvests the wheat. You must price in the cost of fuel in the trucks that deliver it from the farmer to the manufacturer. Transportation costs are ultimately layered into all those levels that finally deliver the loaf of bread to your table.”

An upward move in the price of oil, then, has a big multiplier effect on all aspects of our market for that loaf of bread.

So if the energy cost component exists at all levels of production before you and I purchase our loaf of bread, don’t we want to create more supply by having increased domestic oil production (and, yes, some of this has to do with refining capacity too) and ultimately possess a more secure energy policy?

And have I oversimplified it? Sure. But the simple and sublime supersede the stupid. Stupid policy decisions keeping us from expanding our energy opportunities in our own country.

Let’s keep that loaf of bread at an economical price and our energy needs flowing.

Related articles

• Is Inflation Baked In? (krugman.blogs.nytimes.com)