Thursday, March 3, 2011

More Economic Fact-Busting: Commodities v. Grocery Bills

Commodity prices have a big impact on food prices, but not in the way you think. It costs more to transport your box of cereal from Battle Creek, MI to Concordia, KS than the actual corn in the box did. According to the USDA, for every dollar we spend on food, farmers get about 16 cents from the sales of raw food commodities. This is because we like our food really, really refined. And then truck it all over the country. There really is nothing worse than unprocessed foodstuffs.

The above is very valid. However, the story changes as we move into more developing markets. In those countries that rely on more basic grains for their consumption without all the fructose, packaging, and marketing, the raw price of commodities becomes a significant portion of food sales.

I think this is an important distinction that no one is willing to make. The ethanol opposition decries biofuels as the reason for the rising cost of food in the grocery store if wheat goes up $3/bushel. Fortunately for us, bread only increases four cents a loaf – a fairer villain is oil speculators betting on Libyan politics. Yet ethanol supporters can’t wash their hands of food riots in developing nations using this same logic. When you purchase wheat and corn directly to make flour and tortillas, a 50% increase in crop commodities means your food bill just went up 50%. That’s a lot when you make less than $2.50/day (see: 50% of the world).

Conclusion: be thankful you live in a developed country whenever soybean prices spike, because their fluctuations don’t impact people nearly as much in the U.S. as they do in Nicaragua. I don’t like people who are ignorant about the real impacts of crop commodity prices on their grocery bill.

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