Wednesday, May 16, 2007

Farms and Food Prices

L.A. Times fronts an article today about food price inflation in Southern California. (h/t Today's Papers) While SoCal is getting hit hardest, the country generally is seeing a spike in food prices:

    Nationally, food prices rose 3.9% in April compared with the same month in 2006, and the outlook is equally chilling wherever you shop. It is happening for many reasons: inflation, drought, freezing weather, even the rising cost of corn — highly sought after not only as ingredients for thousands of food products but also to make ethanol.

    Food prices in 2007 are increasing at their highest rate in years.

    "We are going to see grocery store prices show one of the most rapid increases in the last 15 years or so," said Patrick Jackman, an economist at the U.S. Bureau of Labor Statistics.
The price spikes are attributed to a number of factors, most notably higher fuel prices and much higher prices for corn as the biofuels industry competes with the food sector. Not mentioned in the article is that the prices increases are happening despite the Wal-Mart effect – people on either side of the Wal-Mart debate agree that the company’s economic heft measurably depresses prices for groceries.

Given that I’m not an economist, agricultural or otherwise, I’m way out on a limb here, but this Means Something. For years we’ve been hearing concerns about losing farmland to sprawl and the diminishing returns of agribiz megafarms. We’ve been hearing simultaneously about peak oil and peak farmland. Now we are seeing what the economic effects of each look like. At the same time, a story like this gives, um, fuel to critics of the biofuels industry.

Prices will surely fall again once the summer gas guzzling again wanes, but we need to keep an eye on the long-term trend. In any event, it makes paying to preserve farmland look a little wiser.


Paul said...


These days, farmer have to be very sophisticated commodities traders, knowing when to buy and sell futures contracts for their crops as well as their supplies. Many buy diesel fuel contracts months in advance, and will likewise sell most of their crop before they ever plant.

Consequently, we don't always see food prices fluctuate in sync with other commodities prices. But eventually price changes have to work their way through the system. When the farmers start buying their 2008 fuel contracts, the price will almost certainly be higher than what they paid last year. So they'll try to hold out for the highest prices on the sell contract for their crops. The folks who use the crop to make other products (e.g. hog feed, cereal and ethanol) will also be buying futures contracts to lock in their future costs.

By the way, contrary to popular belief, this is NOT inflation. Indeed, many things will become more expensive if fuel prices continue to go up. But it just means the more money we spend on gas, the less we have to spend on other stuff.

Inflation happens when the Fed decides to ease its monetary policy and puts a pile of new cash into the money supply -- more than is warranted by the growth in GDP. Feels good in the short term, but takes years to restore balance. I remember the late 1970s - early 1980s, and would not like to go there again.

Anonymous said...

This is a very important subject and you are right on target with the notion of farms disappearing before our very eyes.
While you can attribute the increase in food costs to gas prices, you are also on point to mention the effect of the urban sprawl/development. Places that have been farm land for many many years are now being sold because the farmers make more money by selling, then by farming, so they have to sell.

Also, if we do not regulate growth, we could have other countries not only selling us oil, but our food as well.