Consumers continue to pay high prices at the fuel pump, and costs are also rising at the grocery store. But an Ohio State University agricultural economist says the two aren't related as much as people might think.
Besides transporting food from the farm to processors and then to retailers, fuel prices can affect the cost of food production in many ways, says Ian Sheldon, a researcher with the university's Ohio Agricultural Research and Development Center. Higher fuel costs mean higher prices on the farm for fertilizer, pesticides and other chemicals; increased expenses to run farm machinery; and increased prices for lubricants and even electricity.
And fuel costs have risen precipitously in 2011. Ohio's average price for regular-grade gasoline this week was $3.49/gal., according to the auto club AAA. That's down from an all-time high of $4.16 in May, but still much higher than the $2.72/gal. price tag at this time last year.
But many other factors influence food prices at the grocery store, says Sheldon, who is also the Andersons Professor of International Trade in Ohio State's Department of Agricultural, Environmental and Development Economics and has an appointment with Ohio State University Extension.
"In the U.S., we can expect a 3-4% increase in food prices this year, but a ballpark estimate is that only 10-15% of that increase is due to fuel prices at the farm gate," Sheldon says. "So, of the 3-4% overall increase in food prices you see at retail, you could attribute maybe ½% to higher fuel prices on the farm."
Sheldon based those figures on a World Bank analysis of causes behind the last food price spike in 2008, when U.S. food prices rose 5.5%. In contrast, U.S. food prices in 2010 rose just 0.8%.
"Higher fuel prices' effect on transportation costs from the farm to the processor could have more of an impact on food prices, but manufacturers often absorb some of those increases," Sheldon says.
What's really driving food prices up is a global increase in demand, Sheldon says. "Food prices are being driven by what's going on in Asia – particularly China and India. They're experiencing rapid rates of income growth and people in those areas are adopting more of a meat-based diet. As very poor people switch from a subsistence diet – rice, vegetables and a bit of meat – to more of a meat-based diet, more crops need to be grown for animal feed. That increases prices not only of corn but soybeans, too. This upward trend in food prices is being driven by a strategic shift in global demand, and that's not going to go away."
In fact, although inflation-adjusted food costs in general declined from the post-World War II era through 2000, they have been on the rise since, primarily because of supply and demand, including a leveling off of yield improvements and an increase in global population and economic conditions in major developing countries. The result? Expect food price increases to stick around for the long term, he says.
Another factor influencing food prices include a shift toward growing crops for biofuels instead of for food or feed. "In 2010, 15% of the global corn crop was used for ethanol production," Sheldon says. "There's a growing clash between food and fuel."
In addition, weather conditions have impacted global food supplies: drought in northern China, Russia and Ukraine last year devastated the global wheat crop; wet weather in Ohio and other parts of the Midwest are likely to affect yields this year. On a broader scale, there are indications that global climate change is playing a role in increasing food prices anywhere from 6% to 20%, he says.
"We also have low inventories right now," Sheldon says. "When you have low stocks and a supply shock, the price spike tends to get exacerbated."
Although Americans may grumble as their grocery bills inch up, Sheldon says to keep the matter in perspective.
"Food costs still tend to be a small proportion of our overall budget in the U.S.," Sheldon says. "In the developing world, food is a very large portion of the average budget. When you're living on $1/day, food price increases can really hurt.
"In fact, the World Bank is talking about 44 million people being dragged into poverty in the past year because of higher food prices. While we do have food insecurity in the U.S., too, we have social safety nets in place that help. That's not the case everywhere."