Get Ready for Higher Food Prices

Daily News Article — Posted on February 11, 2011

(by David Hendee, OmahaWorldHerald.com) – Warnings of higher food prices headed for American supermarkets and restaurants were … [announced] Wednesday … when the U.S. Department of Agriculture reported that global demand had pushed U.S. corn supplies to their lowest point in 15 years.

The price of corn, which has doubled over the past six months, affects most food products in supermarkets. It’s used to feed the cattle, hogs and chickens that fill the meat aisles.

It is the main ingredient in Cap’n Crunch and Doritos. Turned into syrup, it sweetens most soft drinks and many foods.

Corn also is part of the agricultural blend that fuels the economies of Nebraska, Iowa and other farming states. Iowa is the nation’s top corn-producing state; Nebraska is third.

Shoppers could see higher grocery bills as early as three months from now, though most of the impact won’t be felt for another six months, said Scott Irwin, an agricultural economics professor at the University of Illinois.

Chicken prices are among the first to rise because the bird’s life span is so short that higher feed costs get factored in quickly, he said. Price hikes for hogs take about a year and cattle two years. Prices on packaged foods take six or seven months to rise.

Tyson Foods, the nation’s biggest meat company, said chicken, beef and pork prices are expect to rise this year, if only slightly, as producers seek to cover costs.

ConAgra Foods Inc. – the Omaha-based producer of brands including Healthy Choice, Banquet and Chef Boyardee – is raising prices on some of its products because of higher costs for corn and fuel, said Teresa Paulsen, a spokeswoman.

The price rally has bolstered the financial fitness of America’s crop and livestock operators over the past eight months. Midwestern cropland is yielding record values. Rural banks and equipment makers report record profits. …..

Bruce Babcock, an agricultural economist at Iowa State University said: “Farmers are going to be earning quite a bit more money.”

Jason Henderson, Omaha branch executive for the Federal Reserve Bank of Kansas City, said farmers are buying more tractors, pickup trucks, grain bins and land.

“And they also come to Omaha to shop and go to events,” he said.

But it hasn’t been simply a spending spree, Henderson said. Farmers are paying down debt and fewer are seeking loan renewals or extensions.

“It’s a good time to be an ag [agriculture] banker,” said Brian Esch, president of McCook National Bank in southwest Nebraska. “But I have concerns over what this means for consumers. If one guy is selling at a record profit, someone is buying at a record level.”

Corn prices have risen over the past six months from $3.50 a bushel to nearly $7.

The U.S. will have a reserve of 675 million bushels left over in late August, when this year’s harvest begins. That’s roughly 5 percent of all corn that will be consumed, the lowest surplus level since 1996.

“There is going to be enough corn for food, for feed, for fuel and for export opportunities,” Tom Vilsack, the U.S. agriculture secretary, said at a Washington press conference.

Babcock, the Iowa State economist, said the U.S. mandate to increase the use of renewable fuels like ethanol is a major reason why the nation’s corn supply is so low. About a quarter of the nation’s corn crop is consumed by the production of ethanol. The ethanol industry’s projected corn orders this year have risen . . . after record-high production in December and January, USDA said.

“We’ve created a hungry business that is dependent on corn, even high-priced corn,” Babcock said.

Bruce Johnson, [an] economist [at the University of Nebraska-Lincoln], said global supply and demand are the root causes behind low U.S. corn stocks. “Ethanol is a factor, but it’s not the driver,” he said.

……….

World-Herald staff writer Ross Boettcher contributed to this report, which also includes information from World-Herald press services. Contact the reporter at david.hendee@owh.com.

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Background

FROM A COMMENTARY ON CORN AND ETHANOL: (from wsj.com)

Why is the United States, one of the world's biggest agricultural exporters, devoting more and more of its corn crop to . . . ethanol?
In 2001, only 7% of U.S. corn went for ethanol, or about 707 million bushels. By 2010, the ethanol share was 39.4%, or nearly five billion bushels out of total U.S. production of 12.45 billion bushels. Four of every 10 rows of corn now go to produce fuel for American cars or trucks, not food or feed.
This trend is the deliberate result of policies designed to subsidize ethanol. ...
This carve out of nearly half of the U.S. corn corp to fuel is increasing even as global food supply is struggling to meet rising demand.
U.S. farmers account for about 39% of global corn production and about 16% of that crop is exported, so U.S. corn stocks can influence the world price. ...
Demand from developing nations like China is also playing a role in rising prices, and in our view so is the loose monetary policy of the U.S. Federal Reserve that has increased the price of nearly all commodities traded in dollars.
But reduced corn food supply undoubtedly matters.
About 40% of U.S. corn production is used to produce feed for animals. As corn prices rise, beef, poultry and other prices rise, too. ...
This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals.
Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. But Cornell University scientist David Pimentel calculates that if the entire U.S. corn crop were devoted to ethanol production, it would satisfy only 4% of U.S. oil consumption.
The Environmental Protection Agency has found that ethanol production has a minimal to negative impact on the environment. Even Al Gore, once an ethanol evangelist, now says his support had more to do with Presidential politics in Iowa and admits the fuel provides little or no environmental gain.
Not that this has changed the politics of ethanol. When consumers didn't buy enough gas last year to meet previous ethanol mandates, the Obama Administration lifted the cap on how much ethanol may be mixed into gasoline to 15% from 10%. Presto! More ethanol "demand."
On [Jan. 21, 2011] the EPA greatly expanded the number of cars approved to use the 15% blend [of ethanol-gas].
Last month, Congressmen whose constituents benefit from this largesse tucked into the tax bill an extension of the $5 billion tax credit for blending ethanol into gasoline.
At a time when the world will need more corn and grains, it makes no sense to devote scarce farmland to make a fuel that exists only because of taxpayer subsidies and mandates.
If food supplies tighten and prices keep rising, such a policy will soon become immoral.