to push feeders into a prolonged negative profit situation yet.
The situation with broilers is even more telling. Quarterly production slipped from 4.2% the first quarter of 2006 to -1.2% by the fourth quarter. This further dropped to -4.1% the first quarter of 2007. However, this was largely due to a 9% decline in the price producers received in 2006. Prices were high in 2005, encouraging producers to expand production. By the second quarter of 2006 prices had declined over 10%. This did induce losses and producers began to reduce broiler output but this happened long before corn prices began to increase.
The last example is milk, which experienced a rapid run-up in production in 2005 and early 2006. Consequently, in 2006 milk prices dropped 15% from a year earlier. Predictably, dairy farmers slowed the rate of increase in milk production and by 2007 milk prices began to rebound. Ironically, this occurred at a time when the world demand for milk protein for a variety of traditional (cheese) and new products (energy drinks, power bars) was increasing significantly, pushing milk prices to record high levels. U.S. export of milk byproducts has exploded in recent months. Again, this had absolutely nothing to do with ethanol and corn prices.
If the higher price of corn is unlikely to be responsible for higher consumer food prices, what is causing them to increase? That can be ascertained by looking at the different food price categories. It should be noted that core inflation in the US has been running at about 2.5%. Food prices had been running at the core rate through January but began to accelerate in February.
Looking at the meat sector, over the last couple of months the rate of price increase has risen to 4-6% range. This would add some upward bias to the overall food CPI rate although, as previously explained, it has virtually nothing to do with corn prices.
Milk prices were actually declining for the bulk of the past year, but are in a catch-up mode at this point. Again, this is due to the underlying supply and demand condition that has little, to do with corn prices or ethanol.
For non-alcoholic beverages and material there is a similar pattern, with prices having picked up the past three months. The logical explanation might be that higher HFCS prices have risen which is subsequently reflected in higher soda prices. This may be a good theory, but then it turns out that soda producers contract for their HFCS supplies once a year, typically at the start of the calendar year. Only about one-half the run up in corn prices occurred before the first of the year so higher corn prices would have had only a moderate impact on increases in this category.
Cereal and bakery products have also experienced a rate of increase higher than the core inflation rate since January. This is due to higher wheat prices, which reflect an increasingly tight world supply and demand situation for wheat. Outside of a small amount of HFCS used as a sweetener in bakery products, it has nothing to do with corn and ethanol
Fruits and vegetables prices have been significantly higher during the entire period. Fresh vegetables and citrus fruits, have been influenced by weather events such as the Easter freeze. Apples, have been in relatively tight supply for over a year with price
increases several times the core rate of inflation. This category is a significant contributor to the higher food CPI.
Readers should now understand that the fuel versus food issue is one of rhetoric, not reality. It is unlikely that the production of meat has been affected by higher corn prices to date. In fact, there is little evidence that any food category has been affected by higher corn prices in any significant manner. Certainly it is true that some food product manufactures have claimed higher corn prices are increasing their manufacturing cost, using this as justification for raising their product prices.
An example might be a cereal company that makes some variety of corn flakes. The value of corn going into a box of corn flakes was about 2.2 cents. Even if the cost of the corn doubled, it is hard to understand how this relates to an increase of 10 to 20 times that much in the price of a box of cereal. There are other examples, such as a feeder/packer complaining about how the higher price of corn has raised company costs. Just days prior, this same company reported record high profits in its’ quarterly statement.
The reality is that to date higher corn prices have had very little impact on consumer food prices. At some future date higher corn prices will probably be more of a factor in rising food prices, but even then the increases are likely to be moderate. Any increase in food prices will be more than offset by the diversification of our energy supplies, lower farm program payments and the improved environmental effect of utilizing ethanol. It is a win-win situation for consumers, farmers and taxpayers.