The rising cost
Issue #112 • July/August, 2008
There are food protests, food riots in which people die, and at least one government has fallen. No one really knows what’s going to happen next or how much worse it’s going to get as food and fuel prices spiral higher. From the amount of hysteria in the media, it would appear as though civilization is coming to an end. And there’s certainly plenty of bad news to lend credence to that notion. But the questions are: How bad is it and is it all bad news?
The bad news
Let’s take a look at what’s going on.
Food prices are going through the roof. In the last 30 years, after accounting for inflation, the costs of both food and fuel had remained more or less constant or, in the case of many of the basic commodities such as corn, wheat, and soybeans, they had fallen until recently.
I remember when a gallon of gasoline cost about 28 cents, but by 2002 it was nearing two dollars. However, the fact is, after factoring in inflation, neither gas nor much of anything else had really increased in real terms in almost 30 years, and the cost of many items had actually gone down.
So, why were prices going up over the last three decades or longer?
What we were really witnessing was the value of our money, the dollar, falling. Since leaving the Gold Standard, the purchasing power of America’s currency has relentlessly fallen and you can bet on it falling far into the future. But in “real” terms, the costs of most things were actually going down.
However, today, the real price of both foodstuffs and fuels are going up. That is, they’re going up even after we make adjustments for inflation. Worse, they’re spiraling out of control all over the world, including in countries where the difference between eating and starvation is a thin line.
There’s no single cause for the rise in the cost of food or fuel. But food has been affected by more factors, any one of which could have caused a price bump that would have gone unnoticed by most Americans. But some commentators have called what’s happening with food costs recently a “perfect storm,” referring to the convergence of several events, each of which, individually, would have caused little concern but which, happening all together, are creating disaster on an international scale.
Just a few years ago the price of most types of wheat on the futures market was $3.50/bushel. At this writing, they’ve all passed $10/bushel and some are up over $15/bushel. Corn, soybeans, and other commodities are all seeing the same kind of increases. This year alone, the price of rice doubled on world markets in a single five-week period. And just since mid-2007, prices overall have risen another 40 percent. Other commodities are increasing, too. Globally, all food prices escalated almost 25 percent from 2006 to 2007, with cooking oils increasing by 50 percent, and dairy by 80 percent.
Compare that to 2006 when food prices escalated by a large, but still manageable, nine percent. We’d give anything to see those days again.
Remember the 1970s?
This is not the first time food prices have spiked. Most people have forgotten the rise in food costs that took place in the 1970s. Back then it was because of bad weather, rising oil prices, and secret grain deals Washington made with the Soviet Union. And after factoring in inflation, we’re still below the peak for food prices that we witnessed back then. Still, the current price surge is creating problems and no one knows how much higher food and fuel prices will go. Nor are they able to forecast the social unrest higher prices will cause.
Higher prices vs. starvation
Although there are grumblings over food prices here at home, Americans spend a smaller percentage of their disposable income on food than any other country in the world, about 6.5 to 7.5 percent, depending on how the calculations are made, before the prices recently started to skyrocket. And if food prices in this country were to increase by 50 percent or even double, and we spent 13 percent to 15 percent of our incomes on food, we’d complain in the checkout lines of our local grocery markets, but we wouldn’t starve.
However, in other countries where the money spent on food has historically made up a sizable chunk of a family’s income, that is 40, 50, or even 75 percent, a 50 or 100 percent cost increase can mean constant hunger and even starvation.
And increases such as those are already happening in some of the poorest countries in the world. Across West Africa, the prices of basic staples have risen more than 50 percent with them soaring by as much as 300 percent in some countries. And rather than just complaining about them, there have been protests in Egypt, the Philippines, and, closer to home, Mexico. There have also been riots in Haiti, Indonesia, Burkina Faso, Cameroon, India, Senegal, Mauritania, and other countries. Some governments are teetering because of the problem, while in others, such as Haiti, they’ve fallen.
By the time you read this, you’ll have read of or seen on the news more protests and more riots in poor and not-so-poor countries in response to the ever increasing prices.
By the end of 2007 some 37 countries had already announced they were in the middle of food crises and 20 of them had imposed some kinds of price controls or rationing. In China, the government has had to tap its grain reserves to help hold the prices down. But if those reserves run out, expect to see the prices jump around the world as the world’s most populous country turns to world markets and tries to import even more of the basic staples to feed itself.
Some countries, such as China, Vietnam, Ukraine, and Russia, have cut or banned the exportation of grains, further exacerbating the crises in countries needing to import them.
It may seem that what happens in these countries is going to be their own problem and won’t affect us here in the United States. But they already are. As foreign countries compete to buy grains, prices are going up here, too. The cost of a loaf of bread has about doubled, and shortages will occur that affect us too. As an example, Wal-Mart and some other grocery outlets are now putting limits on bulk rice purchases.
The possibility of political turmoil
There is also the possibility of political change both here and abroad. (Remember that it was economic turmoil that allowed the communist revolution in Russia and enabled megalomaniacs like Hitler and Mussolini to come to power in Germany and Italy.) When food is disappearing off your dinner plate and your children are crying out of hunger, radical solutions begin to seem reasonable. Revolutions by the hungry may change the face of global politics.
What’s behind the rising prices?
There are many drivers escalating the prices of foods. They include:
Rising oil prices. When adjusted for inflation, the price of a gallon of gasoline or diesel fuel has remained surprisingly constant for the last 50 years. It’s only recently that the prices have shot up far faster than inflation. As I write this, gasoline is up about 30 percent at the pump over last year and diesel is up 40 percent.
And it’s even pricier in Europe. Depending on which country you want to consider, the gasoline price at the pump in Europe can run anywhere from double to almost triple the price per gallon than it does here. The prime reason for the inordinate prices in Europe is because of taxation. Taxes on a gallon of gasoline in this country run about 49 cents, with some localities running higher because of local taxes. But the taxes on a gallon of gasoline in Europe run about six times higher.
On the other hand, though the price of a barrel of crude has risen for both Americans and Europeans, it’s going up much faster for Americans. This is because our dollar is falling in value while the European currencies, particularly the euro, are stable. Those in the OPEC countries aren’t stupid; they see the value of our dollar going down and they don’t want to be “cheated” out of their money.
Increased fuel costs = increased food costs. But how does this rise in petroleum prices affect what we pay for food? Let’s start with transportation costs.
Truckers have seen a dramatic rise in the cost of diesel fuel, the fuel that powers most of this country’s over-the-road transportation. In June 2002 the average price/gallon for diesel was $1.286. As of today, it has gone over $4 a gallon and the upward trend shows little sign of abating.
When you consider almost everything that comes into your home had to ride in a truck at some point, and that the increased cost of diesel fuel will be passed on to you, this will not only mean higher food costs but a rise in the cost of almost everything.
There’s also the cost of running mechanical planting and harvesting equipment, such as tractors, reapers, combines, etc., that will directly affect food costs.
Then there are costs of fertilizers, pesticides, and herbicides that are made from petroleum. All of these costs will ultimately be reflected in your grocery bill.
But the largest part of the increase in food costs has been because of the diversion of crops to the production of biofuels. In this country, Congress mandated that petroleum companies begin blending their gasoline with ethanol and start providing biodiesel to replace petroleum-based diesel fuels. Congress’ intention was to make us less dependent on foreign oil. But the result is that 20 percent of our grain supply was used to make fuels in 2006, 25 percent last year, and estimates are that it will be up to 30 percent this year. The unintended consequence has been to create shortages and raise the prices of corn and soybeans to new highs. And because farmers wanted to take advantage of these price increases, they are taking wheat fields and other crops out of production and planting more corn and soybeans instead.
The result is less wheat for human consumption and for feeding livestock. Less wheat means wheat costs more, just as corn and soybeans do.
But the rising prices of grains drives the price of other commodities up as it translates into higher prices of not only bread but beef, chicken, pork, milk, butter, and eggs from the animals to which we feed grains. This is happening both here and in other countries. The increased food costs are affecting everybody.
Other countries had also jumped on the biofuel bandwagon. Britain’s “target” was to produce five percent of the fuel it uses for transportation from biofuels. However, in light of runaway food prices, that decision is now under review. Other countries, including the United States, may follow suit.
Another unintended consequence is that the drive for biofuels is leading to deforestation in Third World countries as land is cleared to create farmland. Here in Western countries, there are those who say it’s unacceptable that food production and deforestation in developing countries is being used to make biofuels for Americans and Europeans. But some in those countries, such as President da Silva of Brazil, point out that biofuel production offers hope for economic development. Many living in those Third World countries feel that saving the forests will do them no good if they are relegated to perpetual poverty. Production of biofuels is one way for them to try to grab a slice of the economic pie we now enjoy.
The falling dollar. Another factor in the rise in prices—and this is an important one because it is the biggest reason the price of a barrel of oil is rising so fast here as compared to the rest of the world—is the weakening dollar. (See sidebar on What’s a “strong” dollar and what’s a “weak” dollar?) For decades the dollar has been the most important currency in the world. Other important currencies are the euro, which is the common currency of many of the nations of the European Union and several other countries, the British pound, and the Japanese yen.
But the value of the dollar against these and other currencies has some important effects on Americans.
A strong or rising dollar makes foreign goods less expensive for Americans. It makes taking a vacation overseas cheaper. But it also has a downside in that a rising dollar makes American goods more expensive on the world markets, making it harder for American manufacturers to compete internationally. When the dollar is strong, it’ll take fewer dollars to buy the VW, so an American may opt for that and may be less apt to buy an American Ford or Chevy. It’s also one of the reasons American businesses have, until now, been willing to outsource jobs, that is, send jobs overseas. Labor is cheaper over there, but the wage gap is narrowing as the dollar falls.
On the other hand, a weak dollar, which is what we now have, makes American goods cheaper on world markets. It also makes travel to the United States less expensive for foreign travelers, but more expensive for Americans to go abroad, again benefitting American businesses. And when the dollar is weak, Americans are less likely to buy foreign goods and more apt to buy American. So, we’re now less likely to buy that VW and more likely to buy an American car.
It would be fine if that’s all there was to it, but there are some things which we have to import even though the price is going up. Petroleum is one of them. It takes even more dollars to do that when our currency is weak, and it begins to drive up the cost of everything that depends on petroleum, as explained earlier.
Another advantage to a weak dollar is that jobs that were outsourced are now more expensive for us to pay for, so some of them are going to come back here. And another irony is that some countries may opt to outsource their jobs to the United States.
Because of our weaker dollar, the balance of trade is also slowly changing and our trade deficit, now over nine trillion dollars, is already growing at a slower rate and may (but don’t hold your breath on this one, yet) actually reverse.
Of course, not everyone is helped by a weakened dollar. Among those hurt are importers and those who specialize in foreign goods. For example, your local VW and Toyota dealers. Even the prices on goods from China, that fill many of the shelves at Wal-Mart, are going up and those goods are gradually becoming less attractive to consumers when contrasted with their American-made counterparts.
Also, a weak dollar is making American crops even more attractive to foreign buyers and this added competition by the rest of the world to buy American farm products makes them more expensive for the American consumer.
Finally, if you haven’t already guessed it, because the declining dollar will create more jobs here, it will actually make a recession less likely. And the economic stimulus package sponsored by the current Administration and Congress, much of which will be spent on American goods, is starting to look like a good idea.
Demand for grains from developing countries. Another of the drivers increasing food costs has been the world’s growing population. More people means more mouths to feed. And this means more competition for all the world’s resources.
As of May 2008 there are more than 6.6 billion people on this planet. At the current rate of growth, there will be nearly 9 billion by 2050. That’s another 2.4 billion people eating in the next 42 years. Unless food production keeps stride with the population growth, expect the cost of food to increase.
But the cost of food will increase anyway, even if the world’s population were to stabilize tomorrow, because of increasing demand for meat and dairy products among the emerging middle classes in Third World countries. This is going to put even greater demands on grain consumption and drive up its price. It takes 16 pounds of grain to grow one pound of edible beef, six pounds to produce a pound of pork, four to produce a pound of turkey, three for a pound of chicken, and two to produce a quart of milk from a cow. The emerging middle classes of India and China, the world’s two most populous countries, are developing tastes for the same food stuffs we in this country have grown accustomed to: more meat, more dairy, more bread—all the things we take for granted, they want now. Their per capita consumption of meat products has grown by 150 percent just since 1980.
Bad weather. Bad weather has destroyed or stunted crops, especially wheat crops, around the world including in the United States, Canada, Europe, Ukraine, China, Australia, and Argentina, all of them among the world’s top grain-producers. In some places it was drought and in others it was flooding. In China, it was both. This has added to the world’s shortages and has driven prices higher.
Low grain reserves. It should come as no surprise that stored grain supplies are now at a 30-year low. As these reserves run lower, and in some countries they are going to run out, the prices of all grains will be driven to new heights.
Already, the reserves in the United States are below what we would need to ride out a bad year of harvests. And that’s worse news than you think because the United States accounts for fully two-thirds of the world’s grain reserves. At this writing there is a 59-day reserve in this country, meaning, if we had a disastrous crop year, and we consumed the stored reserves at our current rate of consumption, we would have less than a two-month’s supply. Long before that, there would be rationing and nosebleed prices.
So, is there possibly a bright side to any of this?
Yes. It’s a good time to be a farmer, at least in this country and some others. Grain prices have rarely been higher than they are now. And it’s a good time to be an entrepreneur because opportunities abound.
Are there solutions? Yes.
I don’t want to come across as a Pollyanna, but the fact is that there’s a silver lining in this cloud that’s descended on us. In fact, there are several silver linings. There are not only opportunities for America, there are opportunities for individual Americans.
There’s no way I can list all the possible opportunities or solutions to the problems confronting us today. In part, this is because some of them are going to come as a surprise to us.
But among the solutions, we already know about solar, wind, and few other alternative energy sources some are trying to develop. But there are even more that seem to have fallen out of the news and I’ll try to list a few.
Other petroleum sources. Although environmentalists will scream if we try to develop them, there is still much oil in North America. Three possible sources that are noteworthy are:
- An estimated 5.6 to 16 billion barrels of oil locked up in the Arctic Wildlife Reserve.
- At least 44 billion barrels on the outer continental shelf of the United States along with 232 trillion cubic feet of natural gas.
- There is also a lot of oil in oil shale all over the West that, with the price of petroleum now well above $120 a barrel, we should consider the economics of.
On a national scale, there are alternatives to petroleum that will have the added benefit of spurring investment and creating new jobs. These don’t just include the biofuels that are driving up grain prices right now, though they’re a start.
Nuclear power. One of the criticisms of biofuels is the amount of energy required to convert grains into usable fuels and the conventional thinking is that this will require the burning of fossil fuels to do it. But there are other sources of energy that will not only power our homes and recharge the batteries in our electric cars, they will provide good clean power to make biofuels more economically. First and foremost is nuclear energy. Fifteen percent of the world’s energy is currently produced by nuclear power. However, because of the politics of nuclear energy, no new nuclear power plants have come on line in the United States since the Watts Bar Nuclear Generating Station in Tennessee did in 1996.
Nuclear is safer than most people think. Sounds crazy? It’s time to revisit it as a viable and endless source of clean energy.
Coal. Although there is a push to biofuels, there are other alternative fuels we can develop. In World War II, the Allies had so thoroughly bombed many of the oil fields Germany depended on that they resorted to making synthetic fuels out of coal. They ran their trucks and flew their planes on the stuff. We can, too.
This country has one-third of the world’s known coal deposits. It’s time we look into the possibility of turning to it.
Steam-driven cars. There are even viable alternatives to today’s cars powered by the internal combustion engine, and I’m not talking about electric cars, though they are an alternative whose time is yet to come.
At one time steam-driven cars made up a large percentage of the vehicles on the road. I’ve watched for several years, since I wrote about steam-driven cars (“Steam-driven cars—cars from the past that would make ideal cars for the future,” BHM’s Sixth Year Anthology) for some of the automotive companies to reintroduce a steam-driven automobile. Steam engines are not limited to the fuels they use as internal combustion engines are. They can run on any number of fuels as long as they burn and generate heat.
It’s worth noting that steam-driven vehicles have a number of advantages over the gasoline-driven types. Among them are a higher torque rating off the engine so transmissions are not required. They’re also easier to make nonpolluting. And, if you want power, it’s a historical fact that all the early automobile speed records were set by steam-driven cars.
Mass transit is nice, but I sincerely doubt Americans really want to give up the independence a personal automobile or pickup truck affords. I know I don’t. The steam engine could be revived in no time at all.
The long run
Everything we do, every solution we try, will have trade-offs and consequences some will find undesirable; everything will also have consequences, both desirable and undesirable, that will be unintended and unforeseen.
In a society and economy where entrepreneurs are unfettered (where their ideas are allowed to both succeed and fail on their own merits) we have a better chance at a good future.
In a society where special interests, politicians, and bureaucrats determine what happens, we have a better chance of the “dark ages” the doomsayers are predicting.
What’s going to happen over the long run? We’ll get by this. We’ve seen higher food prices than this before, though we’ve never seen petroleum prices this high.
But as food prices rise, food production will increase. It’s the way free markets work. Food prices will stabilize, then they’ll start to drop. However, they may never come back to what we’ve been used to for reasons I’ve given earlier, such as the burgeoning middle classes in countries such as India and China.
Even petroleum will come down eventually, but not until the dollar stabilizes, and probably not to the low prices we’ve enjoyed until recently.
Opportunities for you
What can you do to take advantage of the bad times that seem to be coming?
BHM has always been about self-reliance. What with the rise in food prices and the food shortages that may be around the corner, now’s the time to stock up, to buy in bulk, and if you don’t have a garden but have room for one, it’s time to consider planting one.
If you have enough room to have your own flock of chickens for both meat and eggs, it’s time to do that.
And if you have the means of producing your own food, you also have the potential for marketing it locally either on the roadside or in local markets.