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Sunday, August 26, 2012

Changes in Commodity Prices and the Price of Food

Michael Roberts argues that changes in commodity prices have very little impact on the price of food:

What's the price of corn in your meat? Less than you think., by Michael Roberts: ... So much of our food is ultimately derived from corn, or from other commodities like wheat and soybeans whose prices track corn prices fairly closely. But it ... makes little difference.

Take meat, for example. There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork. ... This can vary a bit from operation to operation or how it's measured, but feed use efficiency has risen a lot over the last couple decades with the growth of confined animal feeding operations, or CAFOs.

Let's says 5 pounds of corn per pound of meat. There are 56 pounds of corn in a bushel and since June prices have increased from about $5 to about $8 per bushel. This means the amount corn in your quarter-pound burger have increased from about 11 cents to about 18 cents. If there is market power by processing companies or retailers, retail prices would go up by less than this amount (this is basic microeconomics, but I'll save the details for another time). So, you'll have to squint to see the effect of this year's drought on prices at grocery stores and restaurants.

There are lots of complaints about CAFOs being inhumane for animals. That may be, but they are also extremely efficient at using resources. Without CAFOs, you would see bigger prices in all kinds of food, and this year's heat and drought would have caused a larger price spike. We would also be using more land in crop production globally, and be using more fertilizers that pollute water and all manner of other environmental problems that follow from crop production. Many environmentalists don't like CAFO's but they may well be doing more good for the environment than eating grass-fed beef, unless the high price of grass fed beef causes you to eat less. (Granted, grass-fed beef is probably healthier.)

Anyhow, the main point is that commodities are a tiny share of retail prices in developed economies. Prices of most everything, including food, is made up primarily of labor and capital costs, plus rents to producers and retailers with market power. The big concern for high commodity prices in the developed world where the commodity share of food expenditures is much, much greater and people spend a much larger share of their income on food.

[I have a feeling there will be disagreement about the desirability of CAFO's...]

    Posted by on Sunday, August 26, 2012 at 10:03 AM in Economics | Permalink  Comments (34)


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