Environmental Engineering Reference
In-Depth Information
DID YOU KNOW?
Although higher commodity costs may have a relatively modest impact on
U.S. retail food prices, there may be greater effect on retail food prices in
lower-income developing countries. As a relatively low-priced food, grains
have historically accounted for a large share of the diet in less developed
countries. Even with incomes rising, consumers in such countries consume a
less processed diet than is typical in the United States and other industrialized
countries, so food prices are more closely tied to swings in both domestic and
global commodity prices.
worth of corn, or about 4% of the $2.05 average retail price for chicken breasts. Using
the average price of corn for 2007 ($3.40 per bushel) and assuming producers do not
change their animal-feeding practices, retail chicken prices would rise 5.2 cents, or
2.5%. Using the same corn data, retail beef prices would go up 14 cents per pound, or
8.7%, while pork prices would rise 13 cents per pound, or 4.1%.
These estimates for meat, poultry, and corn-related foods, however, assume
that the magnitude of the corn price change does not affect the rate at which cost
increases are passed through to retail prices. It could be the case that corn price fluc-
tuations have little impact on retail food prices until corn prices rise high enough for
a long enough time to elicit a large price adjustment by food producers and notably
higher retail food prices.
On the other hand, these estimates may be overstating the effect of corn price
increases on retail food prices because they do not account for producers poten-
tially switching from more expensive to less costly inputs. Such substitution would
dampen the effect of higher corn prices on retail meat prices. Even assuming the
upper-bound effects outlined above, the impact of rising corn commodity prices on
overall food prices is limited. Given that less than a third of retail food contains
corn as a major ingredient, these rising prices for corn-related products would raise
overall U.S. retail food prices less than 1 percentage point per year above the nor-
mal rate of inflation.
Continuing elevated prices for corn will depend on the extent to which corn
remains the most efficient feedstock for ethanol production and ethanol remains a
viable source of alternative energy. Both of these conditions may change over time
as other crops and biomass are used to produce ethanol and other alternative energy
sources develop.
Even if these conditions do not change in the near term, market adjustments may
dampen long-run impacts. In 1996, when field corn prices reached an all-time high
of $3.55 per bushel due to drought-related tighter supplies in the United States and
strong demand for corn from China and other parts of Asia, the effect on food prices
was short lived. At that time, retail prices rose for some foods, including pork and
poultry, but these effects did not extend beyond the middle of 1997. For the most
part, food markets adjusted to the higher corn prices and corn producers increased
supply, bringing down price.
