Home » High priced oil, not ethanol is key to increased food prices

High priced oil, not ethanol is key to increased food prices

Jun 6, 2008 10:22 AM, By Ron Smith
Farm Press Editorial Staff

Oil at more than $120 per barrel plays a much larger role in rising food costs than the conversion of crop and cropland to bioenergy production.

Add higher non-farm labor costs, a few drought-induced harvest shortfalls, plus increased demand from developing nations and renewable fuels production accounts for even less of the recent upsurge in food prices, says Jose Pena, Texas Extension economist at Uvalde.

And it may be even less than that, considering recent USDA reports. The April 8 World Agricultural Supply and Demand Estimates show corn production during the 2007-2008 season at a record 13.074 billion bushels, up 2.535 billion bushels from the 10.535 billion produced in 2006-2007.

That increase was almost enough to offset the 3.1 billion bushels of corn converted to ethanol production in 2007-2008.

“If you take this almost full offset out of the equation, food prices would still be high because the diversion of corn for ethanol is not the driving force,” Pena says.

“The record $118-plus price per barrel of oil, which permeates the entire food system, has a far greater impact on increased food costs than the diversion of corn for ethanol production.”

Pena says other factors, including increased labor costs, increased grain exports, decreased foreign production and increased consumer demand for more expensive imports and higher-priced organic products add to higher food costs. So do “opportunistic price increases in the food chain,” he says.

Higher U.S. food exports result from drought-reduced production in other countries and also the weak dollar, which makes U.S. goods more affordable.

The oil situation is not likely to change any time soon, Pena says. “According to recent reports, world oil production has leveled off at about 82 million barrels a day for the past several years. China and India are increasing energy consumption to satisfy growing populations. Demand will continue to rise as the economies of these two and other countries improve, increasing demand for cars and other products,” that consume high amounts of energy.

Labor costs also make a big difference. “The rising cost of labor may be one of the most important factors driving food costs higher,” Pena says. “Non-farm labor accounts for 38.5 percent of the cost of food, a proportion that has been increasing, while the farm value in food has been a diminishing proportion of the final price. Since the 1950s, an increasing percentage of the retail food bill has been taken up by marketing (cost added after the product has passed through the farm gate). In return, farmers have taken a smaller and smaller portion.”

Pena says in 1950, farms took 41 percent of total retail food costs. In 1970, that percentage dropped to 33 percent and today it’s below 20 percent.

Farmers face significant cost increases as well. USDA’s latest estimate of agricultural production costs indicates a $279.2 billion cost of production for farmers in 2008. That’s up about 8.6 percent from last year, but up a whopping 25.5 percent from 2005, “the year prior to the recent rise in energy cost,” Pena says.

And government subsidy payments, while the subject of strong criticism during the ongoing farm bill debate, will be down about 30 percent over the last ten years, 1998 through 2007.

And even with significantly higher commodity prices, especially for wheat, corn and soybeans, uncertain weather and high production costs indicate farmers are carrying significantly higher risk.

Pena says conversion of corn to biofuel will not solve the nation’s energy demands, but represents “an initial step to gain energy independence. Biofuel production is just one small piece of the solution,” he says.

Other potential solutions include cellulosic ethanol production “if the technology can be commercialized.”

Even that will not be enough, he says. Energy independence will require “major advances in technology for vehicle mileage improvements, changes in driving habits and changes in modes of transportation such as reduced reliance on trucks and increased use of barge and rail shipping, increased use of mass transit systems in cities and development of new fuels, such as plug-in cars, hydrogen and other fuel systems yet to be developed.”

Pena says the food price issue is real and must be addressed.

“But it is a much broader issue than biofuels. It will take biofuels and many more components to solve the impending oil crisis.”

And high-priced oil is hard-locked to the high cost of food.

email: rsmith@farmpress.com