Prices in nearly every sector of the U.S. economy are rising. Food is the most recent one to gain attention. While some are quickly blaming ethanol production and increased corn demand as "the" factor, naturally it's more complex than that. Certainly, gas prices are playing a role, and one has to wonder if food companies aren't taking advantage of the opportunity to push prices up a bit on end products.
Naturally, the National Corn Growers Association has stepped forward to argue that corn does not carry the primary blame. Farm products are a small part of the overall cost of food, and corn remains a relatively inexpensive food ingredient, contends NCGA.
Numerous cost factors contribute to retail food prices, as USDA points out. Labor costs account for 38 cents of every dollar a consumer spends on food. Packaging, transportation, energy, advertising and profits account for 24 cents of the consumer food dollar. In fact, farmers receive just 19 cents of every consumer food dollar.
“If corn rises 50 percent from its 2007 average price, going from $4 to $6 per bushel, means a per-pound price of about 11 cents,” says Ron Litterer, NCGA president. “Even a standard box of corn flakes contains about 10 ounces of corn – less than a dime’s worth."
Certainly corn is costing livestock, dairy and poultry producers a lot more today, that cost is not transferring to the consumer. USDA reports that higher corn prices pass through to retail prices at a rate less than 10 percent of the corn-price change.
“In general, retail food prices are much less volatile than farm-level prices and tend to rise by a fraction of the change in farm prices," according to Ephraim Leibtag, a USDA economist. Bruce Babcock, an Iowa State University economist, pointed to USDA's recent acreage shift and said it's unlikely to increase food prices at the grocery store. According to Babcock, prices for chicken and eggs have already risen because of the higher cost of corn feed, while the rise in dairy prices has more to do with strong worldwide demand for milk rather than feed costs. For pork, the abundant supply will keep a lid on prices, and beef's demand has been weak.
Despite rising prices, Americans spend just 10 percent of their disposable income on food, a percentage that has declined steadily and significantly.
According to USDA, U.S. food price increases are stable overall. With a few exceptions, food prices have followed or slightly trailed overall inflation. USDA recently reported that marginal retail price increases, due to higher energy and other costs, will likely continue through 2009, leading to food price increases somewhat greater than general inflation. After that, however, retail food prices are estimated to increase at less than the general inflation rate. For perspective, food inflation was 4 percent in 2007, compared to the 25-year average of 2.9 percent.