Tuesday, May 8, 2007

Food Prices Increasing Due to Ethanol

From IBD:

Food prices rose at a 5.2% annual rate in the three months to March, the biggest gain in years. That's a big reason, along with resurgent energy costs, why the overall consumer price index climbed at 3.8% pace in March vs. a 2.1% decline back in December.

Core CPI, which excludes food and energy, rose at a more-modest 2.3% pace over the latest three months.

Congress has mandated that 4.7 billion gallons of renewable fuel be added to the gasoline supply this year, rising to 7.5 billion gallons in 2012.


Rising corn prices will "exert upward pressure on meat, dairy and poultry prices by raising animal- rearing costs, given the predominant use of corn and soy meal as feedstock," the International Monetary Fund said in an April report.

Soy meal is used to make biodiesel fuel.

Consumer food prices are expected to rise 2.5%-3.5% this year, up from 2.4% in 2006, according to the Department of Agriculture.

Let's place this problem in perspective.

The Federal Reserve is in a corner right now. On one had, the US economy is slowing down. GDP growth clocked in at 1.3% in the 1st quarter of 2007. To stimulate the economy, the Fed could lower interest rates.

But inflation pressures may prevent the Fed from lowering rates. Not only does the Fed have to contend with oil prices, but now the Fed must deal with rising agricultural prices. Here's a chart of the Goldman Sachs agricultural futures index.

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Notice how the average has increased from the 175 area to the 260 area over the last 2 years. That's a compound annual growth rate of almost 22%.

Here's a simple example of how this is hitting the average consumer:

Most agriculture experts say milk prices will jump in coming months as producers pass along increased costs for livestock feed (read: higher corn prices because of ethanol) and a spike in overseas demand.


Ken Bailey, a dairy expert at Penn State University's College of Agricultural Sciences, predicts an overall 8 percent increase for whole milk, from an average of $3.07 a gallon to about $3.35 in October.

The news is worse, though, if you live in New York, where milk this week shot up 60 cents a gallon to $3.54, a 20 percent increase, according to the U.S. Department of Agriculture. In Chicago, milk prices in April jumped 12 percent from a year earlier and are expected to rise further. In Boston, prices are 8 percent higher over last year and are also seen moving higher.

So long as we have ethanol mandates, this situation will continue.