NCPA - National Center for Policy Analysis

Expect Food Prices to Increase

February 15, 2011

A combination of natural calamities and congressional mandates has come together to drive world food prices to levels that make some governments in developing nations nervous, because higher costs can mean political instability, as evidenced in Egypt and Tunisia.  The toll on American grocery carts thus far is low, but analysts say price increases are coming, according to USA Today.

  • The immediate causes of the rise are clear: bad harvests due to drought in Russia, China and Argentina and floods in Australia, among other things.
  • But a longer-term cause may come as a surprise -- 24 percent of the U.S. corn crop is now mandated to go to ethanol, taking slack out of the world food market and making price shocks more likely, agricultural economists say.
  • Add lower-than-expected corn yields last year and, according to U.S. Department of Agriculture figures out last week, U.S. reserves of field corn are at their lowest levels in 15 years.
  • The demand for corn for ethanol is now at 4.9 billion bushels per year; corn prices have almost doubled, from $3.49 a bushel in July to $6.10 in January.
  • Corn futures as of last week were $6.90 a bushel.

For Americans, there are "definitely indications that point to higher prices, but we've yet to see a major impact," says Ephraim Leibtag, a U.S. Department of Agriculture (USDA) food economist.  USDA is predicting rises in the food price index for 2011 of 3.5 percent to 4.5 percent for pork, 2.5 percent to 3.5 percent for beef, 2.5 percent to 3.5 percent for eggs and 4.5 percent to 5.5 percent for dairy.

Source: Elizabeth Weise, "Ethanol Pumping up Food Prices," USA Today, February 10, 2011.

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