Food price inflation won't be as bad as feared in 2013
Mike Doherty is Illinois Farm Bureau's senior economist and policy analyst.
Published: Sep 24, 2012
Fears that food prices will be driven up by the Midwest drought’s impact on corn supplies have been featured in many recent news stories.
The Bureau of Labor Statistics, the federal agency that tracks actual food prices in grocery stores, recently forecast all “food at home” would increase 3 to 4 percent in 2013 vs. 2.5 to 3.5 percent for 2012 and compared to a 4.8 percent actual increase in 2011.
If food prices in the absence of a drought in year 2011 increased nearly 5 percent, why would prices increase by only 3 to 4 percent following a drought of such magnitude as the one experienced this summer? The answer lies in several surprising facts regarding food prices.
The first is that the price of corn, as a raw ingredient, is nearly inconsequential compared to the cost of modern food processing, packaging, wholesaling, transportation, storage, and final retailing.
As an example, even in the case of breakfast “corn flakes,” the cost of the corn “at the farm gate” inside each box is only 3 to 4 cents.
What about livestock feed and the impact on meat, egg, and milk prices? Surely corn must make a major contribution to those price increases. Think again.
USDA’s Economic Research Service (ERS) estimates that total feed costs make up barely half of the expenses for dairy operations, about one-fifth of the expenses for raising beef cattle, 40 percent for raising hogs, and only about one-third of the expense of raising poultry.
Corn is only a portion of “total feed costs,” according to ERS.
As a result of corn as a portion of livestock feed, ERS has projected beef and poultry prices would increase a mere 3.5 to 4.5 percent in 2012, 4 to 5 percent for beef in 2013, and only 3 to 4 percent for ”all meats” in 2013.
Meanwhile, poultry and egg prices were forecast to increase only 3 to 4 percent in 2013 and, for dairy products, only 3.5 to 4.5 percent in 2013.
The price increases are indeed modest when compared to the nearly 7 percent increase in dairy product prices in 2011, which was driven mostly by energy costs.
Overall, changes in the supply and demand of corn simply does not add up to dramatic changes in food prices.
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