Food Prices Are Higher, But Little Goes To The Farm
Non-farm labor costs are a huge component of the recent rise in the retail cost of food. Farm share of food income continues to drop.
Eggs rose by nearly 30 percent in 2007; pork rose 4.5 percent.
You may not have noticed, but Hamburger Helper now only comes in 40 varieties instead of 75. Sara Lee is changing its bread recipes to use cheaper, lower-protein wheat. And Campbells Soup, according to the Wall Street Journal, is reducing the number of meats, vegetables and spices it uses in its products.
Rising food prices are causing companies to alter time-honored recipes to reduce costs. Okay, reducing the number of Hamburger Helper choices by about half may not be a huge loss. (Do we really need "Cheesy Jambalaya"?) But the rise in food prices has been dramatic over the past year — and since the trade in commodities is worldwide there is a worldwide alteration in what people eat and what they pay for food. Rising incomes worldwide are allowing people to buy more food. And that increase in demand is pushing up the prices of all agriculture commodities.
"Everywhere, the cost of food is rising sharply," wrote New York Times reporter David Streitfeld over the weekend. "Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics."
In the U.S., the increasing use of corn to make fuel (ethanol) has been blamed for the rising price of grains. Last week, President Bush said that the boom in ethanol production was "beginning to affect the price of food. And so we got to do something about it."
A report issued recently by the Kansas City Federal Reserve Bank acknowledges that biofuel production has increased the demand for grains, but the increasing cost of food is not so simply explained. The rising cost of labor may be the most important factor in driving food prices higher.
There's no question that food prices have jumped recently, writes Jason Henderson of the KC Fed. "Food price inflation in 2007 rose twice as fast as overall inflation," Henderson wrote. And those increases were accelerating as the year passed. Moreover, food prices are expected to continue their rapid rise in '08.
Fine, but the story gets more interesting when Henderson dissects what is driving those prices heavenward. Surprisingly, perhaps, the Federal Reserve vice president finds that increased labor costs played a major part in the increasing cost of groceries.
Over the past 50 years, the cost of the food in food has been a diminishing proportion of the final price. Since the 1950s, an increasing percentage of the retail food bill has been taken up by marketing, by the cost added after the product has passed out of the farm gate. In return, farmers have taken a smaller and smaller portion. In 1950, farms took 41 percent of the total retail cost of food. By the 1970s, it was down to 33 percent. Today, 20 percent.
Non-farm labor, however, accounts for 38.5 percent of the cost of food, a proportion that has been increasing. We're eating more processed food and more food in restaurants. In the 1970s, labor costs accounted for only 28 percent of the food bill.
And Henderson writes that labor costs have been growing. Food manufacturers and food service firms have been hiring workers recently, and these firms have been paying higher wages. Average weekly earnings have been growing faster than inflation. "In the year ahead," Henderson wrote, "labor costs are expected to fuel food price increases."
Higher fuel bills have also contributed to more costly food in grocery stores and in restaurants. (National Public Radio followed a piece of French toast to see how prices have been rising from the field to the restaurant plate.) So do the competition for grains from ethanol plants and the demand for food from around the world.
Farmers will no doubt remember that there was little talk in the first five years of this century about food prices. During those years, the price of corn didn't budge. Now, with prices rising, there is a commotion — and an expectation that farmers will grow our way back to lower prices.
"To meet the growing demand, agriculture will need to put more acres to the plow," writes Henderson. That, or farmers must become more productive, a feat Henderson believes could be achieved by the increased use of genetically modified crops.
As for the future, the Federal Reserve official says food prices will continue to go up.