Food inflation and shortages go more and more mainstream

An issue that, only recently, was way off in things like Foreign Affairs (and my rants in Economics lectures) hits the Washington Post for some actual serious discussion:

Earlier this year, corn began getting pricey because it was in high demand to make ethanol. That sent prices rising for other corn-dependent products, including milk and meat. Now wheat is costing more and more because of poor harvests and greater global demand, sending grocery bills still higher.

Although wheat doesn’t touch as many foods as corn, which is used in products as varied as livestock feed and high-fructose corn syrup, its price directly affects staples such as cereal and bread.

The Bureau of Labor Statistics reported that food prices increased 4.2 percent in the 12 months ended in July. That compares with a rise of 2.2 percent in 2006. The consumer price index for food, which includes groceries and dining out, is forecast to increase 3.5 percent to 4.5 percent this year, according to the Agriculture Department.

It does take them a while to get down to the declining yields, this year (and does not include things like the removal of the EU’s “set-aside” requirements). They do however discuss quite well the problem of crop replacement, as demand for corn blew the financial yields on other crops out of the water.

It even has an example that my students can expect to see on Monday morning:

Those numbers have real consequences for Steve Rurka, owner of Spring Mill Bread in Bethesda. First, the price of the organic wheat berries he buys from Montana farmers has increased 55 percent from last year, to $14 a bag. Facing more expensive baking supplies and gas prices and higher rent, he tacked on another quarter to the price of his two-pound loaf of whole-wheat bread, bringing it to $4.50.

“There are just so many factors that are contributing to us having to raise prices, and higher wheat prices is a major one,” said Rurka, who grinds wheat berries for his breads at his Bethesda store.

Unfortunately we aren’t up to elasticity, but we have covered the incidence of taxation, so we can follow the consequences easily enough.

Much is (rightly) made of the affect on the broader economy of a decline in ex-food disposable income (as I will call it) and consumer expenditure (which, as we’ve seen, holds up around 70% of the US economy). It shall be interesting to see, as food (grains and cereals, at least) becomes ever more expensive, how that affects specific phenomena, some peculiar to the US, some not:

  • Consumer credit – we’re responding to all our micro-level credit crunches, as retail sales either decline directly, or alter in structure, to the same effect. We’re probably accustomed to consumer fashion outside of our affordability. I don’t think we’re going to be so blithe about consuming food in the same manner. Buying food we can’t afford, but needing the food nevertheless, will invoke a bit of panic.
  • High-fructose corn syrup. Nasty, insidious author of millions of fat diabetic Americans (thank you, Earl Butz, you racist tax-evader). Maybe we’ll stop seeing it in, say, bread and orange juice in this country. We certainly haven’t seen any government policy responding to this slow poisoning, stupiding and malnourishment of the poor. Maybe the market will undo its own damage.
  • Food miles – will they increase or decrease? Pork inflation is listed in this article as a mere percent or so. It’s over 40% in China. Exporters, anyone? As Europe brings its yields back up, depending upon the price of oil, perhaps we’ll be importing ever more. Maybe Australia (whose yields, thanks to drought, look be very poor) will get some of their lost-to-US-subsidies market back. Maybe Mexico can get some of those NAFTA sugar concessions, finally.
  • Meat. I’m with the old Moby argument – meat is a waste of grain (and I don’t eat animals, so I’m not sympathetic); we (generally, meaning not just Americans) eat way too much of the stuff. It makes us aggressive and poisons us. I’d like to see that decline, perhaps even normalising with our human digestive needs.

These are just a few. I would like to see the nature of ‘food’ change, here. I’m vegan and I can eat Oreo cookies, for Cliff’s sake – there’s nothing natural in them. I look forward to the margins on things like high-fructose corn syrup drying up, and breads, cereals, juices, sweets (basically everything, is my point) leaving them out.

I’ll leave you with evidence that I should not be too optimistic. There is also the correction in the agricultural market, which may well dump ethanol (good!) and re-organise its yields for next year. It won’t be enough, because I don’t see climate change (meaning more droughts and cold snaps, not just heat) leaving our crops alone. We can expect both lower yields, and more losses of crops entirely, in our futures.

The trouble with economics though, as I explained to a student yesterday, is people. He is a physics student, taking economics. In his world, the Earth can’t just decide to spend a year over by Jupiter – so his rules aren’t like a trawler’s net, held together by their own exceptions. Lucky bastard.

Butch Meharg, a 49-year-old Fairfax resident, has felt the price increases for months. He recently came to a Safeway in Fairfax to buy steaks, bread and instant coffee that he saw were on sale in a newspaper advertisement.

With beef prices up 6.4 percent in the past year, it’s been harder to afford his favorite meal, T-bone steak. Now, he loads up on bread, coffee and other goods when there is a sale. He said he tries to make his streak last longer by cutting it into smaller portion sizes and freezing portions he doesn’t eat right away, making sure nothing goes to waste.

While loading his blue SUV with several bags full of sale items, Meharg said: “I do anything to find the deals now – look at coupons and take more than one trip to different stores. It’s worth it.”

Who knows, maybe it’s a small SUV. But he still had to pump just-hit-USD80-per-barrel oil into it, on his way home.

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