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Report Shows Several Factors Contribute to Food Prices
Some critics claim that rising corn prices are responsible for rising food costs. They also claim that the food versus fuel tradeoff for corn-based ethanol will only drive consumer food prices higher. However, a recent report from Informa Economics cautions that statistical evidence does not support these conclusions. The Renewable Fuels Foundation commissioned the Informa report titled "Analysis of the Potential Causes of Consumer Food Price Inflation."
The report states that there are many food products that are either derived from corn – cereals, sweeteners, oils – or food commodities affected by the corn market – livestock, poultry, wheat, soybeans.
Informa cites United States Department of Agriculture ERS October 2007 statistics that show corn is not a significant driver of prices for food products. For instance, corn accounts for 4 percent of the retail price of corn flakes cereal, 3 percent of the retail cost of corn syrup and 15 percent of the retail price of margarine. While corn may be 60 percent to 70 percent of feeding cost for livestock and poultry, the upward trend in cattle, hog and poultry prices began in the late 1990s – well before corn prices began to increase significantly in 2006–2007.
A combination of growing population and greater economic strength in many regions of the world is driving an increase in the demand for food. In many countries, economic growth is giving people an opportunity for the first time to raise their standard of living — starting with their diets. This trend is expected to continue. According to the IMF, global GDP is expected to grow by roughly 5 percent annually for the next several years.
Source: IMF October 2007
"It can be concluded that no single factor is the driver of consumer food prices over time or the moderately higher-than-average inflation during the first three quarters of 2007, but rather there is a complex and interrelated set of factors that contribute to food prices," according to Informa.
If corn is not the cause of higher food prices, what is?
The Informa report suggests consumers consider that it takes from 16 to 24 months for beef to move from farm to fork. In this time, the complexity of the buy-sell transactions in the cattle industry disrupts any supply response to changing cattle prices and changing corn or feed prices, according to Informa. Likewise, USDA statistics show there is no correlation seen between hog prices and corn or feed prices.
The report's conclusion states that a complex set of factors drives the food Consumer Price Index (CPI). In fact, the marketing bill, defined as the portion of the food dollar that is not related to the farm value of raw materials, has a stronger relationship with the food CPI than does the cost of corn. While an increase in corn prices will affect certain industries... the statistical evidence does not support a conclusion that there is a strict "food-versus-fuel" tradeoff that is automatically driving consumer food prices higher.
Stocks-to-Use Ratio at All-Time Low
The January USDA crop report reduced the global wheat and coarse grain stocks-to-use ratio to 14.1 percent, an all-time low.
Worldwide stocks remain low – with the USDA estimating 2007–2008 ending stocks as follows:
Meat consumption in the developing world remains well below the levels we are accustomed to in North America and much of Europe, although the gap is expected to narrow over time. In China, meat consumption has more than tripled in less than 20 years. As this growth continues, more animals must be produced, increasing the amount of grain needed for animal consumption.
Source: FAO
- Corn stocks to fall from 107 to 101 million tonnes
- Soybean stocks to drop from 62 to 46 million tonnes
- Wheat stocks to fall from 124 to 111 million tonnes
What’s causing this grain drain?
Corn, soybeans, rice and wheat have to serve as food for humans, feed for animals, and precursors to biofuels. The increase in GDP among developing countries means incomes are rising, allowing people there to use more fuel and to demand more and higher quality food. A growing global population means even more mouths to feed.
One way to increase crop production to ensure ample grain supplies for food, feed and fuel is to increase crop yields. In many developing countries, fertilizer use is unbalanced and below optimum levels. Crop production levels in those countries are often below those in the US, but could be increased by implementing balanced fertilization and appropriate application levels.
With global grain consumption increasing by an estimated 30 million tonnes annually, the growth in demand has continued to outstrip the growth in production. In seven of the last eight crop years, grain production has fallen short of demand. The United States Department of Agriculture projects that the 2007/2008 crop year will extend the string to eight out of nine years and the world's grain to stocks ratio will reach a record-low of 14.1 percent.
Source: USDA January 2008
To review a copy of the Informa report, go to http://www.informaecon.com/
Renew_Fuels_Study_Dec_2007.pdf
or to learn more about the Renewable Fuels Association, go to www.ethanolrfa.org.
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