Minnesota Farmer


Food Costs to go down?

Not that long ago grocery companies were blaming the ethanol industry for high food prices.  Since ethanol plants buy a large part of corn produced in the U.S. they were sure they had a whipping boy to blame.  Then corn prices dropped nearly in half and still grocery prices stayed up.  Now we are seeing lower energy prices and at last we may see lowering grocery prices, or will we.images

A recent Citigroup report stated that “Falling oil prices will be a boon to consumers who can expect to pay less for food, Citigroup’s Aakash Doshi said in (his) Dec. 3 report. About 45 percent of the operating expenses of growing and harvesting rice comes from inputs such as fuels, lubricants, electricity and fertilizer, according to a U.S. Energy Information Administration analysis of U.S. Department of Agriculture data. Energy accounts for about 54 percent of costs of corn and wheat.”9cf1e55ffde24ff18103ef8bbc791ad11

With such a decline in oil prices you would expect an immediate reduction in food prices, don’t hold your breath.  The reduction in gasoline prices due to lower oil cost does not always translate directly to lower food prices any more than lower corn prices do.  Yes, some costs will be lowered, but not immediately.

Electricity is only made from oil in small amounts.  Most electricity is produced by coal, natural gas and hydro-electric plants.  These costs are not affected by oil prices.  Fertilizers and oil based herbicides are already in hand for next years crop and will also need some time to reflect the reduction in oil prices.  Most of agriculture and transportation runs not on gas, but on diesel, and those prices are still holding much higher than falling oil prices would suggest.  None of this looks good for an immediate reduction in food costs.100_3058

Then there is the lag time of planting to harvest.  The 2014 crop is already harvested in the northern hemisphere, or already planted and months from harvest in the southern hemisphere.  Costs for those crops are already set, and cost of production has little correlation to the price received for food products.

Whoa, what did I just say?  The cost of production has little correlation to the price received for food products.  That is the problem with producing a commodity, be it corn, cotton, gold or oil, what it cost to produce something has less effect on its sale price than does supply and demand.

A few years ago drought caused a reduction in corn supply and prices went up.  Today we have a large supply of corn and less demand for the crop so prices are down.  That drought also caused a reduction in world beef herds.  With supplies down and demand stable, beef prices are up.  While the U.S. and much of the rest of the world was buying oil from OPEC prices were high.  Now, new oil reserves in the U.S. and lowered demand for oil products due to more efficient autos and lower priced ethanol competing with oil, mean oil prices are going down.  But what about food?

We here in the U.S. enjoy the distinction of paying less of our paycheck for food than anyone else in the world.  Less than 10% of our average paycheck goes to food.  If you put a few more dollars into our pockets at the gas pump, we will spend it on something else, and a better cut of beef may just be the way we celebrate.  We can afford lattes and premium foods from around the world.  I would expect the cost of the better types of foods to stay high.  We may however, see a reduction in the cost of lower value foods, and that is good for the rest of the world.

Then there is the farmers share which currently stands at 15.8 cents of every food dollar.  When all of those production costs are lowered, they mean very little in the overall cost of food here in the U.S.

So don’t expect a large drop in your cost of groceries because of a drop in fuel prices or corn prices here in the U.S.  There are too many things that move food prices.  As long as we demand the best from the world and  pay so little of our paycheck for it, food in the U.S. will always be a bargain.

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