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Where did my food dollar go?

Nov./Dec. 2008 California Country magazine

Answers to the question "Where did my food dollar go?" can be found mainly on the route from the farm to the supermarket.



That's a question more people have been asking during the past year or so. The affordability of food has been on people's minds more than any time in recent memory.

In most typical years, consumer food prices rise at an annual rate of around 2 percent. This year, food prices may rise as much as 6 percent and forecasters say the rate for 2009 may be similar, though slightly slower.

The reasons for the increase are many and varied, and we'll get to them in a minute. But it turns out that the answers to that question--"Where did my food dollar go?"--can be found mainly on the route from the farm to the supermarket.

Of every dollar that an American shopper spends for food, on average, 81 cents goes toward the marketing of that food. Only 19 cents goes back to the farm or ranch where the food originated.

The U.S. Department of Agriculture provides those figures. It says the marketing costs of food include factors such as labor, packaging, transportation, energy, advertising, profit and taxes.

And it's those costs, principally, that determine the prices for food you pay at the supermarket. Farmers don't set the prices that consumers pay; in general, they sell their crops or commodities for whatever the going market price may be on the day their products are ready to be marketed.

If farmers' costs go up for supplies such as fuel or fertilizer, that's their hard luck. In most cases, they must absorb those rising costs and hope the market price is sufficient to provide some margin of profit. And, while prices have gone up for a number of farm commodities this year, the cost of farm supplies has risen rapidly, too.

In fact, many observers cite record energy costs as a key factor affecting consumer food prices. American Farm Bureau analysts say rapid rises in fuel and fertilizer costs "have a ripple effect throughout the economy and the food chain."

U.S. Agriculture Secretary Ed Schafer describes that ripple effect: "For food products, higher oil prices mean higher costs of transportation, processing, packaging and distribution, and all the other intermediary steps that bring commodities from the farm gate to the retail store."

And, as we've already seen, it's those "intermediary steps" that have the most to do with the prices we all pay at the grocery store.

What else has caused food prices to rise?

According to researcher Michael Whitehead of the agricultural lender Rabobank, "a lot of factors have collided at the same time."

Droughts in Europe and Australia have reduced food production there. At the same time, demand for food has been rising around the world, as people see their standards of living improve and seek to upgrade their diets.

Food imported into the United States has become relatively more expensive due to currency exchange rates that have generally driven the value of the dollar downward. Imported foods from bananas to coffee to chocolate to cashews all become more expensive as a result, and the U.S. imports a higher percentage of its food than ever before.

And then, there's ethanol production. For some commentators, ethanol has become the bogeyman blamed for driving up food prices by diverting corn from food use to fuel. But talk to most farm economists and they'll say, in effect, "It ain't so." They say ethanol production has played only a minor role in consumer food prices. The American Farm Bureau says independent researchers peg biofuels' impact on world food costs at between 10 percent and 30 percent.

Whatever the causes, family farmers and ranchers understand that food price inflation affects everyone.

"We know rising food prices are a problem for a lot of people. Farmers are consumers, too," California Farm Bureau President Doug Mosebar said. "Farmers do all they can to produce food in the most efficient ways possible. And we'll continue working on policies to keep farming sustainable, so we have steady supplies of food for everyone."

Those steady supplies have brought a steady increase in the affordability of food in the United States.

The USDA measures affordability, in part, by calculating what proportion of disposable personal income--essentially, the money you have available after you pay your taxes--the average American spends on food.

According to the USDA, the share of disposable income spent on food stayed steady in 2007, even as food-price inflation began to increase. On average, Americans spent 5.7 percent of their incomes on food to be eaten at home and another 4.1 percent on food eaten at restaurants and other establishments.

The share of income spent on food has actually dropped since 1970, especially for food eaten at home, as incomes rose at a faster rate than food prices did.

So, your food dollar may not go quite as far as it did a year ago. But food remains a relatively small portion of Americans' overall spending. And reports of improved harvests in the United States and other countries this year bring hope that we'll see fewer headlines about food inflation in the coming year.

Dave Kranz is a reporter for the California Farm Bureau Federation. He can be reached at 800-698-FARM or dkranz@cfbf.com.

Food prices...What's ahead in 2009?

Early signs indicate that food inflation should ease in the coming year. Stronger harvests of most staple crops--both here in the United States and around the world--will boost supplies.

The U.S. Department of Agriculture projects record worldwide production of wheat, rice and oilseeds, and says the U.S. corn crop should be the second-largest ever. The American Farm Bureau Federation says wheat production is expected to exceed consumption for the first time in four years.

The larger crops will ultimately affect food prices. But analysts say that will take some time and that larger production alone won't fully offset the other forces that have pushed prices upwards.

Forecasters at the USDA say they expect consumer food prices to rise 4 percent to 5 percent in 2009. That's a slower rate than the 5 percent to 6 percent projected for this year.

The USDA does expect inflation rates to rise slightly in 2009 for most meats and poultry.

The Illinois-based Farm Foundation says supply-and-demand forces should ultimately push food prices lower, noting in a report released this summer that commodity prices historically rise and fall and that markets adjust as consumers and farmers respond to those prices.

"We can be reasonably sure that supply will increase in response to higher prices while demand will diminish, reducing the pressure on prices," the report said. "The challenge facing policy makers is to find policy options that deal with the short-term effects created by rising food prices without creating a new set of long-term problems."


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