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The Real Reason for Rising Food Prices

17 June 2008 Comments Written by: Andrew S.

The real reason for rising food prices doesn’t have much to do with ethanol, but with the declining value of the dollar, according to a guest essayist in the Democrat and Chronicle today. Finally I agree with some economic theory presented in a mainstream newspaper. If only more people understood what was happening to the dollar…

Do not blame rising food costs on ethanol output

JIM OCHTERSKI • GUEST ESSAYIST • JUNE 17, 2008

Whether you are a grain farmer or not, you should understand why food prices are still rising — and it is not because of ethanol subsidies. Long-term trends in worldwide supply and demand for grains and recent increases in food production and distribution costs are driving up costs.

High commodity grain prices mean higher food prices. Both are significantly rooted in the low value of the U.S. dollar, not ethanol subsidies. When the U.S. dollar has a low exchange rate, our crops become a bargain to international buyers, so grain supplies become squeezed and more expensive.

There is a new and unexpected contradiction in the markets for corn, whether for food or renewable energy. Recently, corn traded above $6.30 per bushel for the first time in history. Worldwide demand for corn is very high, yet many New York and Midwestern farmers are planting soybeans and wheat instead this year. In fact, New York soybean plantings are expected to increase by 15 percent this year, which would be a record high. New York corn acreage will be unchanged. Nationally, corn acreage will actually be more than 8 percent lower than last year. This reality counters the expectation that corn would become the most widely planted crop for use in ethanol.

U.S. grain farmers are selling their soybeans for record high prices because the weak U.S. dollar keeps the international market price comparatively low. But more soybeans means less corn being planted. Plus, more people worldwide are increasing corn-fed meat consumption. That’s why corn contract prices are now at historical highs.

How do farmers decide what to plant?

Crop farmers rotate fields from corn to hay to soybeans to other crops, depending on weather, field history, equipment availability and markets.

Locally, our challenge is to refrain from ruining our hometown farmland with residential development if we want to keep our options open for both food and renewable energy. Indeed, this is a time for energy conservation and community farmland protection, not blame for government energy policies.

Ochterski is agriculture economic development specialist, Cornell Cooperative Extension of Ontario County.

 

I agree with everything Ochterski is saying, but I almost wish he would go further. He could have spoken about the worldwide food shortages that have caused most countries (except the US) to close down their food exports and save their food for their own country. If we all understood how serious the issue with food is right now then we would oppose Bush giving massive aid to other countries to buy food, which in turn buy their food from us, driving up our prices. What a shame it is when the government intervenes. I agree fully with Ron Paul, who was educated in the tradition of the Austrian School of economics, on the issue of foreign aid:

Foreign aid is not only immoral, since it involves the forced transfer of wealth, but it is also counterproductive, as a ceaseless stream of scholarship continues to show. Foreign aid has been a disaster in Africa, delaying sound economic reforms and encouraging wastefulness and statism. We should not wish it on our worst enemy, much less a friend. Moreover, since the aid has to be spent on products made by American corporations, it is really just a form of corporate welfare, which I can never support.

Ron Paul, The Revolution, A Manefesto, page 34

There are plenty of other reasons why ethanol is a terrible idea, but the point of this article is to show that dollar devaluation combined with foreign aid are increasing the price of food even more. I encourage everyone to do their own research on this topic.

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Viewing 5 Comments

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    Asserting that ethanol subsidies share none of the blame for rising food prices is outrageous. Mr. Ochterski should know better. Only a year ago (when corn was trading at $4), the USDA was crediting the subsidized and mandated diversion of corn into ethanol as having raised the grain's price enough that price-linked subsidies (e.g., marketing loan payments) no longer had to be paid out.

    The world's population did not surge, nor did Chinese change their diet, overnight. The surge in the use of corn for ethanol -- 75% of the increase in production over the last three years -- was much more sudden. By citing the expected 8% (or greater) decline in corn production this coming crop year as proof that corn is not the dominant ethanol feedstock, Mr. Ochterski shows a breathtaking ignorance of the market. The problem is that federal mandates require a 25% increase in biofuel (mainly ethanol) use this year.

    Hmm. Could rising demand and falling supplies possibly be driving up prices? Naaaaw.
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    While I agree with you that ethanol is probably part of the problem (I am totally against farm subsidies of ANY type for economic and other reasons) the point that I was trying to bring out in this article was the underreported effects of dollar devaluation that are translating to higher prices not only for gas, but also for food and other goods as well. Certainly this is not a one-dimensional issue, because there are certainly food shortages that are contributing whether or not we are subsidizing ethanol production, but dollar devaluation is a MUCH more serious problem in the long-run and we should be taking steps to fix that problem right away.
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    You assert that the "dollar devaluation is a MUCH more serious problem in the long-run". Please explain. The fall in the value of the U.S. dollar against other currencies is a response to many factors, and is an unavoidable and necessary correction. There will be winners and losers. Among the losers will be foreigners holding credit instruments and securities denominated in American currency. Among the winners will be sectors of the economy that export.

    I am much more conerned about self-inflicted damage, such as ethanol subsidies and mandates, which cost taxpayers and consumers dearly -- and not only consumers in the United States, but in urban slums in places like Haiti and Africa as well.
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    The American Dollar is the world-reserve currency at the moment. If it loses that status it helps nobody. This will destabilize the entire world economy with devastating results.

    Some losers include:

    People on fixed incomes- Those who receive government entitlements have seen a 50% decline in the real buying power of their checks in the last 5 years alone.

    Anyone who earns money in dollars- Study the history of countries which experienced high inflation or hyperinflation. Very few people in those countries had pay raises that kept up with the rate of inflation. In fact, it's mathematically impossible and would only accelerate inflation more.

    Anyone who is a fan of US sovereignty- A week dollar means that foreigners can just come and buy up whatever they like for pennies on the dollar. For instance, the Flatiron building and the Chrysler Building in New York City were just bought by foreigners for pennies on the dollar.

    Ultimately the economy as a whole is effected- We don't have that many industries that export anymore. We are a services based economy. When Americans see the value of their dollar has eroded they will stop buying as many pedicures and start walking their dog themselves. They might fire the cleaning lady and start doing their own book-keeping too.

    If you're really curious what hyperinflation could do to the US I suggest you look at the history of Argentina. A little over 100 years ago they were in the top 5 wealthiest countries in the world. Hyperinflation hit and overnight they became a 2nd world country. Perhaps I should post an article about this soon.

    Thanks for the lively discussion!
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    It is pretty doubtful that the United States is heading for the hyper-inflation of Argentina (or Turkey, which experienced it for a decade).

    But you seem to be suggesting that the fall in the dollar is something that the U.S. Government can easily resist, rather than it being the result of market players loosing faith in the ability of the U.S. economy to yield superiour returns. The United States cannot force the world to hold dollars; indeed, many citizens and banks have been shifting more of their portfolio towards the euro and pound sterling for several years.

    If America is concerned about other countries buying up its assets, that process started long ago when it went on a consumption spree financed by willing overseas lenders.
 

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