Food And Fuel Fury Builds

Consumers have felt the pinch of high prices for fuel and food in recent months. Growers of Florida’s crops are feeling that same squeeze in addition to soaring prices for key inputs like fertilizer. As fuel prices rise, the cost of processing, packing, and distribution of food goes up. All of the intermediary steps of bringing a food product from the farm gate to the retail level represent 81¢ of every dollar. 

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High prices make people angry, and it didn’t take long before fingers started to point out blame. Oil executives were hauled in front of Congress for hearings, and talk of “windfall-profit” taxes filled the halls as lawmakers stoked the fire to win over an angry voter or two.

Others argue oil companies are making billions in profits, but when looked at from a margin standpoint, their profits are in line with other corporations. In 2007, the oil and gas industry earned, on average, about 8.3¢ per dollar of sales — near the Dow Jones Industrial Average for major industries of 7.8¢ per dollar of sales. Oil execs also argue they are already facing a high tax burden. From 2003 to 2007, Exxon/Mobile’s earnings grew by 89%, but its income taxes grew by 170%.

Ethanol Takes A Hit

Only a couple of years ago, it seemed everyone was on the ethanol bandwagon as the answer to our troubling dependency on foreign oil. Today, as food prices have joined oil in its upward spiral, the bandwagon seems to be all for blaming ethanol for current affairs. Last month, USDA officials held a briefing to underscore the fact that pointing a finger to just one area doesn’t adequately address food and fuel challenges. Right off, they did acknowledge that demand for corn used to produce ethanol did play a role in higher food prices, but was not the sole cause.

“It’s true that higher demand for corn for ethanol and soybeans for biodiesel has led to higher prices for those crops over the past couple of years,” Agriculture Secretary Ed Schafer said during the briefing. “But we do not have a one-on-one relationship between higher prices for those commodities and what consumers are paying for foods at the retail level.”

Given the President’s mandated alternative fuel goals, it was no surprise USDA would come to ethanol’s defense in the face of growing global criticism. Secretary Schafer gave it his best shot, noting the President’s Council of Economic Advisors estimates that only 3% of the more than 40% increase we have seen in world food prices this year is due to the increased demand for corn to produce ethanol.

Nuts And Bolts Numbers

After Schafer gave his opening statements, Dr. Joe Glauber, chief economist for USDA, got down to more specifics in the discussion of food versus fuel prices.

“There’s no question we’ve seen a dramatic increase in ethanol production, and in particular, corn use for ethanol production over the last couple of years,” Glauber said. “We saw almost a 50% increase from 2006-2007, to the current marketing year. We’re projecting with this crop that’s to be harvested in the fall that we’ll see an increase in the amount used for ethanol to go up by almost 33%.”

Given the demand for corn created by ethanol, Glauber said it is only fair to examine its role in current food prices. With both oil up by 70% and food commodities up by 50% in the past year, the story is grabbing headlines everyday. 

Vicious Cycle

Petroleum prices lead to a vicious cycle that feeds the upward trend of food prices. After remaining low in the past decade, the Consumer Price Index (CPI) for food shows the trend. CPI increases for food each year went up in the 2.5%-range, but last year went up by 4%, and this year could jump up as high as 5.5%. 

Glauber added that fuel prices are driving up the costs of inputs for growers.

“Fertilizer prices have really taken off almost 67%,” he said. “Fuel is up 43%, and feed costs up 23% over the first four months of 2007.”

Factors Fueling Increases

While ethanol is one of the factors causing food prices to go up, there are some other issues at play, such as growing global demand.

“If you were to look at countries like India and China where their GDP has been increasing on the order of 5% to 10% annually, that has expanded demand, particularly demand for meat products, which has contributed to both a growth in livestock exports in the case of this country and also demand for protein meals, soybean meal, and other sorts of things,” said Glauber. 

Droughts in Australia, Canada, and Europe also have contributed to lower wheat crops, which helped create the spike in prices for that crop.

Glauber added that countries placing bans on exports of wheat and rice to protect their domestic supplies have also contributed to the price hikes. The other major factor is energy costs and the impact it has had on food marketing and transportation. Finally, speculators in commodity markets are having an effect on the prices of oil and food, creating situations where fundamentals of supply and demand have no meaning. An oil executive recently told Senators, that when viewed strictly from supply versus demand, oil should be $55 per barrel. However, the weak dollar, geopolitical risks, and speculation are driving it up. 

Schafer closed the hearing by encouraging Congress to get behind a comprehensive energy plan, which includes conservation, exploration of domestic supplies, and innovation of new fuel technologies. Only this, he believes, will help take the pressure off of fuel prices.