U.S. Congress Joint Economic Committee; Chairman, Sen. Charles Schumer; Vice Chair, Rep. Carolyn Maloney

WEEKLY ECONOMIC DIGEST: What’s Behind the Rise in Food Prices?

April 14, 2008

ECONOMIC NEWS: High Gasoline Prices Weigh on Struggling Economy

Consumer debt continues to rise. Last week, the Federal Reserve reported that consumer debt increased by $5.1 billion for the month of February, and is now at $2.54 trillion. The majority of that increase, $4.7 billion, was due to revolving credit (e.g., credit cards). Revolving credit debt totaled $949 billion in March. Additionally, the American Bankers Association reported that, in the fourth quarter of 2007, American consumers fell behind on credit-card, home-equity, and auto loans at the fastest pace in 15 years.
Gas prices expected to rise during the summer driving season. According the Energy Information Administration (EIA), consumers will pay an average $3.54 per gallon of regular grade gasoline during the summer driving season, which runs from April 1 through September 30. This amount is up $0.61 from last year. (See Chart) Diesel fuel prices are expected to average $3.73 this summer, up $0.88 from last year. Moreover, the EIA suggested that average monthly gasoline prices might cross the $4 per gallon threshold.
World economy expected to slow. According to the International Monetary Fund (IMF), the world economy will slow sharply this year, with the U.S. sliding into a recession amid its housing, credit and financial crises. Economic growth in the U.S. is expected to slow to a crawl of just 0.5 percent this year, which would mark the worst pace in 17 years.
Pending home sales fall. The National Association of Realtors reported that pending home sales fell in February to the lowest reading since the index began in 2001. Seasonally-adjusted index of pending sales for existing homes fell to 84.6 from January’s reading of 86.2. A year earlier, the index stood at 107.6.

IN FOCUS: What

This spring the most urgent egg hunts are taking place in the neighborhood grocery stores for eggs at reasonable prices.  Between January 2007 and January 2008, egg prices shot up nearly 40 percent and are up over 115 percent since January 2001. Eggs are just one extreme example in a broader trend; from January 2007 to January 2008, the Consumer Price Index (CPI) for all food grew by 4.9 percent, the highest 12 month increase in over 17 years.  In contrast, the Core-CPI (which excludes volatile food and energy prices) grew by 2.5 percent over the same period.
Two main culprits of food price increases include higher commodity and energy costs. (See Snapshot)  Agricultural prices were up 4.1 percent last month and 33.4 percent over the past 12 months. Between January 2007 and January 2008, inflation-adjusted corn and soybean prices shot up 19.0 percent and 72.4 percent, respectively.  Wheat prices surpassed even those increases with a spike of 128.3 percent.
Energy is a key input to the food industry, both for primary commodities and for processing and marketing finished products.  Natural gas (the feedstock for fertilizer) prices are up 33% from a year ago.  Diesel fuel is up over 45% and regular unleaded gasoline prices have jumped 27% over the year.  High gasoline prices don’t just raise transportation costs; they increase demand for gasoline substitutes, mainly ethanol derived from corn.
Along with high gasoline prices, tax subsidies and federal biofuel mandates have boosted the share of the corn harvest devoted to ethanol production (24.7% this crop year, up from 14.4% in 2005).  This has helped raise the price of corn and other grains, as farmers have shifted more land into corn production. 
Normally, increases in grain prices have modest effects on grocery store prices because primary commodities comprise a small share of retail food costs.  But corn, soybean, wheat, and energy prices have gone up so much that consumers are seeing significant increases in the price of groceries.  Eggs, and dairy prices are up sharply in part because the cost to feed animals has more than doubled since 2001.  Energy costs have helped drive higher fruit and vegetable prices.  Highly processed foods are less vulnerable to higher commodity prices.  For example, even at today’s prices the corn in a box of corn flakes contributes less than 5 cents to its price; the rest includes processing, packaging, marketing, and transportation.
Food prices are likely to continue their climb.  For 2008, the U.S. Department of Agriculture’s Economic Research Service forecasts an increase in the CPI for food consumed at home of 4 to 5 percent.  Over the next decade, the Food and Agricultural Policy Research Institute predicts that continuing high crude-oil prices and new bio-energy mandates from last year’s energy bill will sustain prices at historic highs across all agricultural commodities.
Higher food prices are especially bad news for poor households.  Although maximum food stamp benefits are indexed to prices of the “Thrifty Food Plan” specified by the U.S. Department of Agriculture, the factors that determine households’ share of the maximum are not all indexed to inflation.  Further, the share of U.S. households who receive food stamps has climbed dramatically from 7.5 percent in December 2001 to 11.1 percent in December 2007 and these numbers may even understate the problem.  On a global scale, higher food prices and scarcity are leading to civil unrest in many developing nations (e.g., Haiti) that rely imports for food staples.

THE WEEK AHEAD

 

THE ECONOMY AT A GLANCE

 

Joint Economic Committee Copyright 2007; Email Address: webmaster@jec.senate.gov; G-01 Dirksen Senate Office Building; Washington, DC 20510; (202) 224-5171