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Food Prices a 'Runaway Freight Train'
Now that the big U.S. energy bill has passed, get ready for a corn explosion, one that almost certainly will drive the markets in all kinds of unintended directions.
Most of the media focused on mandates in the bill for higher mileage standards and the end of incandescent light bulbs. But the effect of the energy bill on food will be deeply felt across the economy.
"This is like a runaway freight train," Scott Faber, a lobbyist for the Grocery Manufacturers Association, told the Hendersonville, NC Times-News. "It's great news for corn farmers, but terrible news for consumers."
Corn, for better or worse, drives the U.S. and its citizens. Sugar from corn sweetens nearly everything Americans consume, and now we expect it to fuel our cars in the form of ethanol.
The 94 million acres dedicated to growing corn this year—the highest since World War II—produced a record crop of 13.2 billion bushels.
Special Report: Food Prices Are Out of Control. One ETF is Making Investors Big Profits From This Trend.
The energy bill will double the volume of ethanol by increasing the renewable fuels mandate to 36 billion gallons by 2022, far higher than the 7.5 billion gallons by 2012 requirement for ethanol now on the books.
President Bush, mindful of the over potential for serious food price inflation – on top of already rising prices thanks to global economic demand for grain – has mandated that most of the new production come from non-corn sources like grasses.
Under the new bill, 21 billion gallons of the new target must come from so-called cellullosic sources.
It's hard to see that actually happening. Though much of the ethanol mandated by the new bill can be made from agricultural wastes, at least 15 billion gallons of ethanol would have to be made from grains, chiefly corn, experts note.
The bill would thus have the effect of committing thousands of acres of agricultural land once used for growing crops for human and animal consumption to growing corn for fuel.
Experts figure that increased ethanol production already has boosted consumer grocery costs by 5 percent. Livestock feed costs jumped by more than 20 percent over the past year.
A study done by Iowa State researchers directly attributes higher retail food costs to higher corn prices. Corn costs expected to approach $4.50 per bushel next year, while retail prices for eggs could rise by 13.5 percent and for meat by 7.5 percent.
The Iowa figures are supported by the Consumer Price Index, which reports that grocery prices overall rose 5.4 percent over the past year, well over the 4.3 percent overall inflation rate.
Government economists ( :???: ) are predicting grocery prices will go up another 3 to 4 percent in 2008.
Cheap food and feed have been a fact of life in the U.S. for so long that cattle ranchers and poultry farmers are scrambling to find alternatives as the ethanol push marches on.
Yet ethanol itself is only one of several factors boosting grocery bills.
Higher fossil fuel costs make transporting food more costly. Overseas demand for agricultural commodities is on the rise as people in developing economies become more able to add meat and dairy products to their diets.
Inflation is turning into a global concern. Economists from Asia to Europe are watching prices rise with trepidation. It has begun, too, to affect investments.
"Sentiment in the region is getting worse," David Ng, at Hwang-DBS Asset Management in Kuala Lumpur told the International Herald Tribune. "First we had slowing U.S. growth; now add on inflation fears. That makes for a bad combination."
Whatever the outcome, don't think that having a drink will help take your mind off higher food costs. The cost of barley malt, necessary for making beer, has risen 88 percent this year.
Meanwhile, the cost of producing bourbon – which is 70 percent corn – is certain to rise.
