July 3, 2007              

 

Drought, fuel and labour costs cause food and feed price hike not corn

 

 

Though ethanol demand has exorbitantly pushed prices of corn and grain, the growing demand for the grain in Asia, adverse weather conditions, transport and labour costs are the major factors in hiking food prices, according to US economists.

 

The jump in food prices, in reality, are edging up only 1.5 percent more than they did last year and the year before, an annual rate of increase between 3 and 4 percent, according to the Economic Research Service (ERS) of the US Department of Agriculture.

 

Grain prices do have an impact on animal feed that translates only to small increases at the retail level and isn't a driver of price increases, according to Ephraim Leibtag an economist at ERS. He added inaccurate information about corn prices and alternative energy hiking food prices just isn't true.

 

In reality, transportation and energy costs are responsible for most of the increase in prices, experts say.

 

According to Ed Maxiner, an editor with the Kiplinger Agricultural Letter, the greatest contributor to higher prices is fuel-- from growing, processing, packaging and shipping. Maxiner said higher energy costs also drive up overhead expenses for grocers, restaurants and warehouses.

 

Those costs get passed along to consumers in the form of higher prices, he stressed. 

 

While increases in corn prices are almost always tied to ethanol demand, there are other factors such as drought, Leibtag said. He said demand for human food and livestock has increased dramatically with earning power in the middle class in Asia has soared and adverse weather conditions are reducing the grain's production which spells to higher prices.

 

Drought has momentarily crippled Australia's milk-producing cattle herds. 

 

The cut in subsidies in the EU's dairy -- which will have farmers get fifty percent for its milk-- also drove up world milk prices and pulled US prices along for the ride, Leibtag said.

 

However the EU subsidy will only translate to only about 3 percent at the supermarket -- considerably less than the 7.5 percent increase in milk prices in 2004.

 

Milk prices paid to dairy farmers are regulated by a complex market formula that factors in recent demand for various milk products. Dairy farmers have no control over the prices they get paid, no matter what their feed costs.

 

According to Mike Brook, Kansas State University extension dairy specialist, an increase of one ration in cattle feed would have farmers switch to some farm operations which could mean reduced production and impact supply.

 

Brooks stressed higher feed costs don't mean additional charges from dairy farmers.

 

Corn, in fact, is not a significant ingredient in dairy rations. It accounts for only about 20 to 25 percent of the ration.

 

Brook said rising cattle feed prices should be blamed to alfalfa, another major ingredient in cattle feed.

 

Leibtag said grain prices and feed costs are of far more significance to farmers than to consumers as higher corn and milk prices will be good for farmers.

 

He added higher costs to cattle, swine and poultry feeders is not a "big part of retail prices because raw materials are such a small portion of the retail price."

 

Only about 20 percent of the US consumer's food dollar goes to pay for the raw materials received from the farmer. The other 80 percent goes to food marketing services, including labour, packaging, transportation and energy.

 

Labour used by manufacturers, wholesalers, retailers and eating establishments accounts for nearly 40 cents of every food dollar.

 

Packaging accounts for 8 cents, and those costs have been on the rise. And energy and transportation, each about 4 cents of the dollar, are also rising rapidly.