Food Fight

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The Bureau of Labor Statistics recently confirmed what shoppershave been noticing for months: the price of food is increasing atan unusually rapid rate. And failed government policies-supportingdomestic farmers through restrictions on cheaper imports andstimulating demand for corn-fed ethanol-are adding to consumers'woes. The federal government can and should take this opportunityto alleviate the effect of higher prices at the grocery store byreducing taxes on imported rice, dairy products, and sugar and byabandoning its misguided support for biofuels.

Paying More for Food

During the calendar year 2007, food prices in the United Statesincreased by 4.9 percent, with especially marked hikes for staplessuch as milk, cheese and bread (see Table 1). That was higher thanthe overall inflation rate for urban consumers (the CPI-U) of 4.1percent over the year to December 2007 and much higher than the 2.1percent increase in food prices in 2006.[1] In other words, food prices arerising more quickly than consumer prices overall, and more quicklythan in the previous year. In the seven years 2000 to 2006, foodprices increased by a comparatively modest average of 2.5 percent ayear.

Table 1Food Product Price Increases (12 months ending December2007)


Product1 Price increase (percent)
Milk 19.3
Cheese 13.0
Bread 10.5
Poultry 6.3
Fruits and vegetables 5.9
Cereal and bakery products 5.4
Meats, poultry, fish, and eggs 5.4
Beef 5.0
Food away from home 4.0
Alcoholic beverages 3.8
Nonalcoholic beverages 3.5
Pork 1.4

Although U.S. government policies are clearly contributing tohigher prices, other international factors are also at play. Thefood price index used by the Food and Agriculture Organization ofthe United Nations increased by almost 40 percent in the one yearperiod since September 2006, primarily because of increases in theprices of dairy products and grains. That compares to a 9 percentincrease in the 12month period to December 2006.[2]

Poorer people are especially hurt by higher food prices, becausethose with lower incomes spend a higher proportion (up to 50percent) of their disposable income on food. To the extent thatthey prepare meals at home, the effect is more direct as they arecloser to the origin of the supply chain (where there is lesspotential for absorbing higher prices). For those low-incomecountries that are net food importers, and therefore receive littleoffsetting gain for their farmers from higher food export prices,the situation looks worse: the FAO recently estimated that thetotal cost of imported food for this group of countries in 2007would be some 25 percent higher than the previous year.[3] American (andEuropean) biofuels policies that artificially inflate food pricesabroad are harming the poorest of the world.

The frustration is showing. Rising soybean prices have seen massstreet protests in Indonesia recently.[4] Other governments, such as thosein Egypt, India, Kenya, Morocco, the Philippines and Vietnam haveimplemented what lamentably few governments will acknowledge is theright policy and have reduced tariffs on imported food (some ofthem have also restricted exports).[5] China has recently introduced pricecontrols on grains and their products, edible oils, dairy products,milk, and eggs in an effort to control inflation.[6] The European Union recentlysuspended its land set-aside requirements in order to replenishgrain stocks.

Growing demand for food, feed and fuel, combined with tightsupply conditions, is driving this phenomenon. Global commoditystocks are at historic lows: wheat stocks, for example, are thelowest level since FAO began keeping records in 1980. Add this to adrought in wheat-exporting Australia and the price for wheat is atan all-time high, having doubled since early 2007. Withoutincreased agricultural productivity, the trend is set to continue.The International Food Policy Research Institute recently estimatedthat global cereal prices will be 10 to 20 percent higher by2015.[7]Futures prices for commodities indicate that the market expectshigh prices to continue for the foreseeable future.

In the past, agricultural commodity prices have beencharacterized by volatility around a trend decline, with periods oflow prices typically outlasting temporary rallies. That was becausecommodity prices were mainly supply-driven: technology andproductivity improvements increased agricultural yields, withweather conditions causing short-term fluctuations. Whileagriculture is still subject to the vagaries of the weather andwill continue to benefit from productivity improvements, drought inAustralia and the end of dairy export subsidies in EU havecontributed to lower global supplies. Higher fuel prices haveincreased the cost of transporting commodities.

Facts on the demand side suggest that the recent price increasesare more structural compared to the cyclical, supply-driven boomsof the past. Government policies in developed countries that seekto support farmers by creating artificial demand for ethanol are animportant culprit. In addition, economic growth in countries suchas China, Brazil, and India has created a large and growing middleclass that is acquiring western-style eating habits. The Chinese,for example, have almost doubled their consumption of meat fromabout 44 lbs. per capita in 1980 to 110 lbs. per capitatoday.[8]That in turn has pushed up demand for feed grains, because one lb.of beef requires about 13 lbs. of grain to produce.[9] Although highprices will encourage entrepreneurs to increase production, andinfrastructure investment will help increase yields and correct thecurrent market imbalance, government actions are impeding theefficient allocation of resources that would normally see lowerprices.

How U.S. Government Policy Exacerbates FoodCosts

Of the extra money that Americans are spending on food, some ofit is as a direct result of government action. Consumers paid animplicit food tax of $5 billion in 2006, according to theOrganization for Economic Cooperation and Development, because thefederal government supports some farmers by maintaining pricefloors for their products.[10] The U.S. government also constrains supply bypaying farmers to leave land idle as part of its ConservationReserve Program.

In addition to taxing American consumers of rice, sugar, anddairy products, and subsidizing farmers to take land out ofproduction, the federal government has contributed to highercommodity prices globally by encouraging the ethanol industry.Primarily derived from corn in the United States, ethanol affectsthe price of corn directly by adding to demand, and othercommodities indirectly by drawing cropland away from theirproduction. Indeed, in the last year the supply of corn hasincreased 24 percent in the northern United States during 2007,primarily because of higher corn acreage (the highest since 1933).Ethanol capacity has risen by around 40 percent in the last yearbecause of government incentives. As farmers shifted production tomeet surging demand for ethanol, the acreage devoted to rice,cotton and soybeans has decreased by 3 percent, 18 percent, and 16percent respectively.[11]

The ethanol boom has knock-on effects in the rest of the ruraleconomy. The growing use of cereals, sugar, oilseed and vegetableoils to produce ethanol and biodiesel is supporting crop pricesand, indirectly through higher animal feed costs, raising costs forlivestock production. As Table 1 shows, the prices for poultry,beef, and eggs have all increased by more than 5 percent this year.(Pork prices have risen relatively slowly because production hasbeen very high compared to demand, although producers are expectedto lower production during 2008 because of losses from low pricesand higher feedcosts.[12]) Farmland prices in key corn-growing statessuch as Iowa, Nebraska, and South Dakota have increased by morethan 20 percent in the last year.[13]

To be sure, higher commodity prices mean lower taxpayer outlayson price-triggered agricultural subsidies. The Congressional BudgetOffice predicted in January 2008 that higher agricultural priceswould reduce farm and income support payments in fiscal years2008-18 to an average of $7-8 billion per year, compared withrecent peaks of over $20 billion.[14] But what these higher prices give totaxpayers with one hand, they take away with the other because thegovernment must pay higher prices for the food they buy forschool-lunch and other welfare programs such as food stamps(indexed somewhat to food prices). More importantly, the policiesplace an implicit tax on food and increase the prices that Americanfamilies pay at the grocery store.

Then there are the biofuels subsidies themselves: theInternational Institute for Sustainable Development recentlyestimated that U.S. subsidies for biofuels will cost about $93billion in the years 2006-12.[15] And to ensure that cheaper ethanol doesnot make its way to the U.S. market and harm domestic producers anddistillers, the government levies a 54 cent-per-gallon tax onimported ethanol.[16]

Unfortunately for consumers, politicians' obsession with ethanoldoes not appear to be waning yet. The new energy bill signed byPresident Bush in December 2007 mandates an almost doubling ofcorn-based ethanol usage in 2008-9 billion gallons annually, upfrom 4.7 billion gallons in 2007-and a five-fold increase inethanol blending to 36 billion gallons a year by 2022. The EuropeanUnion has recently joined the party, too, by agreeing in March 2007to use renewable sources (primarily rapeseed-or canola-oil) for 20percent of power production and biofuels for 10 percent oftransport fuel by 2020. None of these trends bode well forconsumers looking for relief.

Although current high prices reflect largely global events,Americans should remember that, thanks to the federal government,they have traditionally paid up to double the world price for dairyproducts and close to triple the world price for sugar. Because ofU.S. policies that protect the domestic markets for these productsfrom import competition, Americans will still pay high prices forthose products, even in the event that global commodity pricesfall.

Instead of conflating the harm done to consumers from highglobal food prices, the federal government should abandon itsprotection of U.S. farmers from competition and its pursuit of amisguided biofuels policy whose environmental benefits are spuriousat best. Politicians especially keen to "stimulate" the economy byputting more money in the hands of consumers should start byreducing the taxes on imported dairy products, sugar, rice, andethanol.

Notes


[1] Bureau of Labor Statistics, "ConsumerPrice Index: December 2007," news release, January 16, 2008,http://www.bls.gov/news.release/pdf/cpi.pdf, accessed January 17,2008.[2]Food and Agriculture Organization of the United Nations, "FoodOutlook: Global Market Analysis," November 2007, www.fao.org/docrep/010/ah876e/ah876e00.htm.[3]Jacques Diouf, Food and Agriculture Organization of the UnitedNations, Press Conference on Soaring Food Prices and Action Needed,December 17, 2007, www.fao.org/newsroon/common/ecg/1000733/ed/facts99.pdf,accessed January 17, 2008.[4]R. Minder, J. Aglionby and J. Song, "Soaring Soyabean Price StirsAnger among Poor," Financial Times, January 18 2008,www.ft.com/cms/s/0/508be5de-c552-11dc-811a-0000779fd2ac.html.[5]Diouf.[6]R. McGregor and J. Blas, "China Vows to Act on Prices,"Financial Times, January 9, 2008, www.ft.com/cms/s/0/a1199c74be9c-11dc-8c61-0000779fd2ac.html.[7]Joachim von Braun, "The World Food Situation: New Driving Forcesand Required Actions," IFPRI's Biannual Overview of the World FoodSituation presented to the CGIAR Annual General Meeting, Beijing,December 4, 2007, www.ifpri.org/pubs/agm07/jvbagm2007.asp..[8]Diouf; and author's kilograms-to-pounds conversion.[9]Cornell University News Service "U.S. Could Feed 800 Million Peoplewith Grain That Livestock Eat, Cornell Ecologist Advises AnimalScientists," press release, August 12, 1997, www.sciencedaily.com/releases/1997/08/970812003512.htm.[10] Organization for EconomicCooperation and Development, Agricultural Policies in OECDCountries: Monitoring and Evaluation 2007 (Paris: OECD, 2007),Table 15.1 (provisional figure).[11] National Agricultural StatisticsService, Crop Production: 2007 Summary (Washington: UnitedStates Department of Agriculture, January 2008), http://usda.mannlib.cornell.edu/usda/current/CropProdSu/CropProdSu-01-11-2008.pdf.[12] C. Hurt, "Pork Producers May FaceWorse Year Ever in 2008", Weekly Outlook, PurdueUniversity and University of Illinois at Urbana-Champaign, January7,2008, www.farmdoc.uiuc.edu/marketing/weekly/html/010708.html.[13] J. Perkins, "Iowa Farmland PricesRose Nearly 23% in 2007," Des Moines Register, January 22,2008, www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20080122/BUSINESS01/801220375/1029/BUSINESS.

[14] Congressional Budget Office, "TheBudget and Economic Outlook: Fiscal Years 2008 to 2018", January2008, http://cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf.

[15] D. Koplow, "Biofuels-at What Cost?Government Support for Ethanol and Biodiesel in the United States:2007 Update," Global Subsidies Initiative, October 2007, www.earthtrack.net/earthtrack/library/BiofuelsUSupdate2007.pdf.

[16] For more on ethanol, see JerryTaylor and Peter Van Doren, "The Ethanol Boondoggle: Who's KiddingWho?" Milken Institute Review (First Quarter 2007).