Are Consumers willing to pay more for food to be energy independent?

RISING FOOD PRICES LINKED TO ENERGY POLICY
by Steve Fair

In the December 14th edition of The Economist, the cover story was “The End of Cheap Food.” The article cited rising incomes in Asia and the ethanol subsidies in the U.S. as a reason American consumers are paying more for food. Large emerging markets like China and India have increasing per capita incomes and the first thing people start buying when their income increases is better food. We really don’t appreciate how good we have it in the U.S. when it comes to food.

In 1970, the average American family spent 13.8% of their income on food, but almost two decades later; the average American family spends less than 10% of their income on food. When you consider that in poor countries, over half of their income is spent on food, Americans have it pretty good. U.S. consumers can thank American farmers and ranchers and efficient food processors, in large part, for that bargain.

According to Brent Searle of the Oregon Department of Ag, "There are few other places in the world where you can get the diversity and the amount of food for the dollar you spend than the United States.” But that may be changing.

"The world eats more than it produces currently, and over the last five or six years that is reflected in the decline in stocks and storage levels. That cannot go on, and exhaustion of stocks will be reached soon," Joachim von Braun of the International Food Policy Research Institute said a recent conference in Beijing. Von Braun predicts the end of cheap food. He says, "The days of falling food prices may be over." "Surging demand for food, feed and fuel have recently led to drastic price increases.” What’s fueling these increases?

What most consumers don’t know is that food consumption and prices are determined by the complex interaction of supply and demand. In the short run, supplies are relatively fixed and inflexible, and prices adjust so products clear the market. What is produced is consumed. When supplies go up, price goes down and consumers buy more. Conversely, smaller supplies bring higher prices and smaller purchases. In the long run, farmers and ranchers adjust production in response to market prices, producing more of higher priced goods and less of lower priced goods.

With oil prices hovering around $90 a barrel, this is bad news for the poor, who have already suffered major impacts from a tripling in wheat prices and near doubling in rice prices since 2000. And it’s not just wheat and rice. In the past year, soybean oil, peanuts, mustard seed, and eggs have doubled in price. Part of the problem is the government’s interference into the free market system.

As The Economist article states, “the rise in prices is also the self-inflicted result of America's reckless ethanol subsidies. This year biofuels will take a third of America's (record) maize harvest. That affects food markets directly: fill up an SUV's fuel tank with ethanol and you have used enough maize to feed a person for a year.” Maize is pressed and refined to produce high frutose corn sweetner that is in virtually every food product that is sweet. Are Americans willing to pay more for their favorite carbonated beverage or cereal in order to become energy independent as a country? Perhaps, but unfortuntely most don’t know they are footing the bill.

The reason we have higher prices at the grocers shelf is partially due to the farm subsidities program, which supplements over two dozen crops at a price tag of $16 billion annually to American taxpayers. Proponents of subsidity programs argue that over production results in lower prices at the grocery shelf, but if the government were to subsidize car manufacturers, there would be more cars than buyers, and the price would come down, but it would be the taxpayers who would be funding the price reduction. A free market system where a manufacturer simply lowers their price until they are at a point of maximum profitability is better than propping up a segment of the economy with taxpayer money. The government needs to get out of the subsidity business and allow the free market to work. It’s the most fair and equitable way for both the buyer and the seller.

Are consumers willing to pay more for their food in order to have alternative fuels such as ethanol? The politicians believe that to be the case and have bet your wallet on their hunch. Of course, it’s not like they are taking food out of your mouth.