PRINT
EMAIL
COMMENT
BUZZ UP
DIGGEXECUTIVE POLL
Bernard Madoff, convicted of running an $65 billion Ponzi scheme, was sentenced to 150 years in jail. What’s your take on his punishment?
OUR PREMIUM CONTENT
The Kiplinger Agriculture Letter
The Kiplinger California Letter
Kiplinger's Biofuels Market Alert
Kiplinger's Retirement Report
SUBSCRIBER HELP
CURRENT LETTER
Overhauling
Financial Regs
PREVIOUS ISSUES
Blame ethanol as food prices creep higher this year and next. Increased use of the renewable motor fuel may help to reduce the U.S. economy's dependence on foreign oil, but it will come with a price at the supermarket checkout line.
Soaring demand for corn, the primary feedstock for ethanol production has helped nearly double the price of the grain over the past year, pushing the price of a bushel to well over $4. U.S. biofuel manufacturers used nearly a fifth of the 10.6 billion bushels of the 2006 corn crop. And plants will more than double their appetite for the crop by 2009; new and existing facilities will ramp ethanol production up from about 5 billion gallons last year to 12 billion gallons.
Though an ample crop this summer should dampen prices somewhat come fall, continued long-term demand for ethanol production will bolster corn prices. Eventually that will show up in consumers' food bills. The main reason: Corn is also a primary feedstock in the production of meat and poultry, which in turn account for the biggest chunk of consumers’ food bills.
The upward bump is likely to show up first in poultry prices. The dramatic jump in the cost of feeding chickens means poultry producers aren’t making as much money on each chicken they sell. As a result, they’ll cut back. When supplies start dropping, prices will climb. Since it takes only a matter of weeks for chickens to go from egg to supermarket meat case, producers can react swiftly to higher input costs, adjusting production to more profitable levels.
For beef and pork, the process takes longer. In fact, consumers will see somewhat lower prices for pork, at least for a while, before prices begin to rise. That’s because as corn prices rise, profit margins on hogs decline and producers opt to cut back by actually sending more female animals to slaughter, rather than breeding them. In the short run, that increases the meat supply and holds down prices. After six months or so, though, the smaller number of pigs born translates into fewer full-grown hogs at the slaughterhouse and pricier pork chops. The same thing goes for cattle and beef, although any short-term price-dampening effect this year is likely to be offset by increased exports and a greater share of cattle fed on grass in pastures, rather than in feedlots.
Increased corn demand will also boost prices for some other foods, including ketchup and soft drinks, which are sweetened with high fructose corn syrup. Food processors will almost certainly pass their higher costs through to consumers. But keep in mind that for most processed foods—everything from Doritos to Coke—the cost of the corn itself contributes only a small portion to retail prices, a few cents out of every dollar at most. Labor, packaging, transportation and so on play a much bigger role. As a result, overall food prices aren’t expected to rise much more swiftly this year than last—about 2%-3%.
For weekly updates on topics to improve your business decisionmaking, click here.
POSTED BY: EBM (March 20, 2007 12:53 PM)
What is our price of oil, when you include the cost of protecting "US Interests" (i.e. oil) overseas?
POSTED BY: Jim Ostroff (March 30, 2007 07:49 PM)
Hi,
I'm Jim Ostroff, an associate editor here at Kiplinger. I report on energy issues for us.
I am not being flip when I note that there is no way to estimate how much U.S. activities in the world affect oil prices.
One could make the case that U.S. diplomatic and military involvement in the Middle East ensures a steady supply of oil to world markets, keeping prices lower than they'd be otherwise.
One could make the case that the U.S. presence in Iraq tends to encourage terrorists in that country to blow up oil pipelines, reducing world oil supplies, increasing oil price. But, if you look coolly at the data, you find that Iraqi oil production is higher now than it was months before U.S. military action there commenced.
One could make the case that if the U.S. had found a way to ensure that Venezuela's Hugo Chavez was replaced by another leader a few years back when he was on the brink of being toppled, oil prices would be lower than they are today.
The point is that one can look at many different scenarios, but there is no way one can say that oil prices would be this much or that much if only the U.S. did or didn't do X.
Thank you for taking the time to write us about this issue. We do appreciate the time you took to do so, as our hope is that our articles will incite people to think.
--Jim
E-Mail Article
Print Article
Reprint Article
