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The True Cost of Rising Corn Prices

by 5m Editor
7 April 2008, at 7:17am

US - The National Corn Growers Association has asserted that the rising cost of corn is having little consequence on the price we pay for food from the supermarket. Experts in the field have cited that farm products are a small part of the overall cost of food, and corn remains a relatively inexpensive food ingredient.

Numerous cost factors contribute to retail food prices, the USDA points out. Labor costs account for 38 cents of every dollar a consumer spends on food. Packaging, transportation, energy, advertising and profits account for 24 cents of the consumer food dollar. In fact, farmers receive just 19 cents of every consumer food dollar.

"If corn rises 50 percent from its 2007 average price, going from $4 to $6 per bushel, that only means a per-pound price of about 11 cents," NCGA President Ron Litterer points out. "Even a standard box of corn flakes contains approximately 10 ounces of corn -- less than a dime's worth.


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"In general, retail food prices are much less volatile than farm-level prices and tend to rise by a fraction of the change in farm prices"
Ephraim Leibtag, a USDA economist

And while corn is a more significant ingredient for meat, dairy, and egg production, the USDA reports that higher corn prices pass through to retail prices at a rate less than 10 percent of the corn price change.

"In general, retail food prices are much less volatile than farm-level prices and tend to rise by a fraction of the change in farm prices," Ephraim Leibtag, a USDA economist, wrote recently. And the Des Moines Register quoted Bruce Babcock, an economist at Iowa State University, saying the shift in crop acreage recently forecast by the USDA is unlikely to increase food prices at the grocery store. According to Babcock, prices for chicken and eggs have already risen because of the higher cost of corn feed, while the rise in dairy prices has more to do with strong worldwide demand for milk rather than feed costs.

Despite rising food prices, food in the United States remains an affordable part of the family budget.. Americans spend just 10 percent of their disposable income on food expenses, the USDA reports, while households in countries like India often spend 50 percent of their budget on food. Even countries in Europe spend more than twice what U.S. consumers spend on food costs. And the amount Americans have been spending on food over the years (as a percentage of their income) has decreased significantly.

Food price increases are overall stable. Over the years, with a few exceptions, food prices have followed or slightly trailed overall inflation. Recently, the USDA reported that marginal increases in retail prices due to higher energy and other costs are projected to continue and lead to food price increases somewhat greater than general inflation through 2009. After that, however, retail food prices are estimated to increase at less than the general inflation rate. For some perspective, food inflation was 4 percent in 2007, compared to the 25-year average of 2.9 percent.

In the end, growers are certain that, even with reduced acreage, they can work smart and meet all needs.

"We have production and supply to meet all corn demands," Litterer said. "Corn growers are not only growing enough corn to meet all demands -- food, fuel, feed and fiber -- but to carry over a good surplus."

5m Editor