Farm News, IA
08-10-07
Rise in fuel costs not strictly related to ethanol
By KRISTIN DANLEY-GREINER, Farm News staff
While food manufacturers are pointing the finger at ethanol for fueling food costs,
ethanol supporters say that’s not the case.
Schwan’s Foods officials say they will raise pizza and snack product prices
because of an increase in costs for raw materials, including corn.
But Tim Johnson, a research analyst with the Iowa Farm Bureau Federation, said
that corn is ‘‘just one of many inputs that are included in the final cost of a
finished product, regardless if it is popcorn or pizza.’’
‘‘It is estimated that a box of corn flakes only contains about 2.2 cents worth of
corn. If corn makes up such a small percentage of a product’s final price, other
factors have a greater impact on the price consumers pay,’’ Johnson said.
‘‘Those factors include packaging, marketing and transportation. It’s also
important to note that even with today’s slight increase in food prices, Americans
spend less on food than any other country in the world. Currently, less than 10
cents out of each consumer dollar is spent on food, and less than 2 cents goes to
the farm sector.’’
The increase in corn acres to support the increase in ethanol production has had
other effects on food manufacturers. Officials with American Pop Corn Company
out of Sioux City, which manufactures Jolly Time brand popcorn, have said that
the demand for corn has spurred an increase in contract costs with farmers who
plant their corn.
Elaine Kub, DTN commodity market analyst, noted that U.S. consumers have
been paying ‘‘very low prices’’ in the grocery store, relative to other nations, for
more than 60 years and in that timeframe, production costs have increased
greatly for crop producers, with prices for equipment, fuel and fertilizer all
‘‘increasing astronomically, and meanwhile the commodity markets have not
proportionally risen to reimburse farmers for those costs.’’
‘‘That argument can be made with or without the increased competition from new
ethanol plants. From that point of view, higher input costs for companies like Jolly
Time and Schwann’s seem more like a correction to market fundamentals than
some new development they couldn’t have foreseen and hedged against,’’ Kub
said. ‘‘However, they have been hit from many angles. Higher energy,
transportation and equipment costs affect their profit margins to the same degree
— if not more so — as crop producers. It’s likely that the higher prices they pass
on to end consumers have more to do with the potential for $100/barrel crude oil
than the potential for $4/bushel corn.’’
Kelvin Leibold, farm management field specialist with Iowa State
University, said that American Pop Corn Company and Schwan’s are both
highly dependent upon ag ingredients. But if you consider frosted corn flakes, for
example, less than 3 percent of the purchase prices ties back to the raw
ingredient, Leibold said.
‘‘So a 50 percent run-up in corn prices impacts the cost of a box of cereal about 1
to 2 percent,’’ he said. ‘‘Jolly Time is using a product that can be replaced acre
for acre by the product it needs — popcorn. If popcorn is 50 percent of the cost of
producing a bag of microwavable popcorn, then a 50 percent increase catches
you in the chin. Milk prices will have to increase to cover feed costs or we will
end up with hamburger fairly quick. I would be guessing what the cost
percentage is of milk in ice cream, but it could be over 30 percent as well. Most
all of these products have also been kicked with higher transportation costs, due
to fuel prices.’’
Leibold said that if corn were to hit $5, the situation could accelerate.
‘‘We will then find out who are the ‘bottom feeders’ of the corn system. Is it
ethanol, chickens, hogs, beef, how much of exports, poor people around the
world? The good news is that farmers in poor countries are probably going to be
able to improve their standard of living without having to worry about the USA
dumping corn into their market under some ‘food for peace program’ and
dropping the bottom of the market. Albeit possibly at the expense of some
starving people,’’ he said.
Looking at the big picture, Leibold said consumers should decide whether or not
it’s better to pay higher food prices at the grocery store and lower prices at the
pump.
‘‘It depends on what you eat, how much and how much you drive. As we have
probably doubled the amount of natural gas we use for industrial purposes in
Iowa in the last two years, we may also be having some impact on the cost to
heat homes,’’ he said. ‘‘I suppose it depends on how much I drive and how big
my home is and how well insulated. So it is about trade-offs, both economical
and social.’’