Monday, January 05, 2009

During these times of ever increasing economic hardship most families are trying to find every way to save on their expenses.

It will be difficult to spend less at the grocery store considering the costs of basic essentials are increasing at twice the rate of inflation.

At least two factions are debating the impact of ethanol on consumer food expenditure.

The cost of food has increased 7.6% in the last year with essential staples such as milk and eggs increasing in cost 13.3% and 29.9% respectively, according to the Bureau of Labor Statistics.

On average, a family earning between $20,000 and $40,000 per year will spend about 14% of their income on groceries (see www.bls.gov for this and other information).

The Food Before Fuel Campaign, supported by the Grocery Manufacturer's Association (GMA), is seeking to inform the public of the consequence of subsidies on consumer food prices and urge elected officials to review policies that support using food as an energy source as in the case of corn being turned into ethanol.

On the website www.foodbeforefuel.org the position is stated, "There are a number of factors contributing to higher food prices including higher energy costs, growing global food demand and changing weather patterns.

However, policies for subsidizing and mandating the conversion of corn to fuel are the only part of the food inflation equation that Congress controls."

Members of the ethanol industry, including Amaizing Energy in Denison, have responded by launching a new trade organization called Growth Energy.

In a press release, POET (Sioux Falls, South Dakota) Chief Executive Jeff Broin stated, "We believe that Growth Energy will be a new, fresh, aggressive voice in the energy debate."

Additional members of the Growth Energy board include representatives from Green Plains Renewable Energy, Inc. (Omaha, Nebraska), Western Plains Energy (Oakley, Kansas), Hawkeye Energy Holdings (Iowa Falls), and ICM, Inc. (Colwich, Kansas).

Darrin Ihnen of the National Corn Growers Association also serves on the board.

The companies said energy costs and factors outside of ethanol drove food prices upward.

During Wednesday's weekly agriculture telephone news conference, Senator Chuck Grassley addressed the high food price issue, and reminded listeners that in the past he has written letters to the GMA urging them to honestly evaluate grocery pricing.

Grassley quoted a Wegmans Food Market representative who said, "During times like this it's okay with us if we make a little less money," as the chain has recently reduced grocery prices.

Grassley responded to their initiative and said, "This is a far cry from the GMA blaming ethanol for rising corn prices and in turn rising food prices when oil and commodity prices rose earlier this year. Food processors and grocery stores reflected their higher input cost almost immediately and passed them on to the consumers." He continued that companies like Kraft, Kellogg's and Sara Lee have posted record profits.

The USDA released a media briefing May 19, 2008 detailing the breakdown of overall consumer food prices where 19 of each dollar represents farm value. The largest percentage is for labor (38.5) followed distantly by advertising and packaging at 12, and transportation and energy at 7.5.

Dr. John Lawrence, director of the Iowa State University Iowa Beef Center - extension program for cattle producers, further explained farm cost input to retail meat prices, specifically relating to pork: 30% of the price paid at a retail meat counter covers the farm share of cost, of the farm cost 60% is related to feed, and 50% of feed cost is related to corn, therefore 9% of the total cost of pork is due to corn.

As an example, for pork chops costing $4.00 per pound, $1.20 is farm cost, 72 is feed cost, 36 is corn cost (36 is 9% of $4.00).

Beef costs can be similarly figured although the effect of corn price fluctuation is less apparent because more forages and fibers are fed to beef animals over the course of their lifetime.

Lawrence continued, "As an economist, I'm having trouble seeing the connection between ethanol and food."
Grain prices peaked in late June of 2008 and the increased costs, Lawrence stated, "were caused by many contributing factors especially global increase in demand and decreased (global) crop productivity."

In relation to animal proteins, Lawrence asserted, "higher prices of beef are caused by either decreased supply or increased demand - neither situation occurred in the first part of 2008," and warned that "foods will continue to increase in cost even when commodity prices seem to be lower due to both biological and psychological lag."

As a reminder, from conception to market the process takes 24 months for cattle, 12 months for swine, and five months for poultry.

Lawrence remarked, "Producers have to experience losses to decide to make changes. It is very difficult to anticipate the future."

He concluded, "We often overlook, right or wrong, the U.S. made a conscious decision to pursue renewable fuels. Economics is all about trade-offs. The opportunity costs for energy may be higher food costs long term."

This is part one in a three-part series.