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A Changing Reality
By Marlys Miller, Editor

It’s been an unusual summer. Stop and think about some of what’s already transpired this year — $147-per-barrel oil, $8-per-bushel corn, red-hot U.S. exports grabbing nearly 25 percent of U.S. pork production, unprecedented personal bankruptcies and home foreclosures, a U.S. swimmer takes home an unheard of eight Olympic gold medals. Seriously, setting one or two such records would be dramatic enough, but the multitude of “firsts” being set this year cannot be ignored, and there’s still one-quarter of the year to go.

Certainly it reflects that some dramatic shifts are underway, and you know how comfortable people are with change. Whether a particular change is good or bad depends on how it impacts you personally, and more people than not have been squeezed this year.

For example, who would think that you could see U.S. pork exports exceed 2007’s record sales by double digits and still not be able to turn a profit?

Of course, the other part of that reality is that the U.S. pork industry will blow past previous slaughter numbers by marketing 117 million hogs this year. That amount could just as easily have sent prices crashing to new lows. The point being, there are many complexities unfurling in today’s changing reality.

It’s human nature to want to simplify the cause and effect of an issue — such as ethanol production is using more corn, which has raised corn prices, which is why food costs more. There is a kernel of truth to that scenario, but there are many kernels in an ear.

While this may be an uncomfortable time, it’s also a good time for you to visit with friends, neighbors, family and other consumers about the reality and complexity of the changing food structure. You see, they also tend to think “If food is expensive and corn prices are high, then farmers are making lots of money.” And by farmers, they mean all farmers, including you.

American Farm Bureau Federation put together a document to shed some light on rising food prices. Farm Foundation also commissioned three Purdue University economists to investigate the topic, creating a report called “What’s Driving Food Prices?”

To start, it’s important for American consumers to think beyond their borders, as the changes underway are the result of global food influences. For example:

• Weather — Before this spring’s Midwest flooding, production shortfalls were under way. Crop outputs in eight key exporting countries fell 4 percent in 2005 and 7 percent in 2006. Rice and wheat were the first two staples to rally to new highs. Some countries halted exports to address needs at home.
• Declining grain stocks — Since 1995, global grain stocks have declined 3.4 percent annually on average. By the close of this year, world cereal stocks are projected to drop another 5 percent, hitting the lowest level since 1982; and that’s with significantly more people to feed worldwide.
• Changing demand structure — Rapid economic development and income growth have increased food demand and shifted diets from cereal to more animal protein. For example, in China, per capita meat consumption has gone from 44 pounds in 1980 to 110 pounds today. (As you know, China has a lot of people.) That means someone has to raise more food-producing animals, which requires more grain.
• World productivity — While demand has grown, agricultural productivity has actually slowed. Globally, productive land is being lost to development and research dollars have dried up, further impeding productivity progress.
• Increased fuel costs — Freight rates have doubled in a year. High oil costs make moving anything anywhere more expensive, including getting a crop harvested or shipping hogs to market. Also add in higher costs for inputs such as fertilizer and natural gas.
• Changing market structure — Whether it’s oil or corn, there has been significantly more speculative activity in the commodity markets. The increased trading volumes have increased price volatility and that comes at a cost.

Those are just a few perspectives. There are many more factors that come into play.

Gone are the days when U.S. consumers could allocate less than 10 percent of their disposable income for food. The new reality is that consumers will be spending more.

U.S. retail food prices on average have jumped 6 percent this year, the most since 1990, and three times the normal annual increase. With U.S. consumers spending $1.1 trillion on food and beverages, it will add more than $50 billion to the bill; that compares with $25 billion to $30 billion historically. Next year, food prices are expected to rise another 4 percent to 5 percent, led by meat and poultry. Meat, poultry and dairy make up about 12 percent of total food spending, according to USDA. The farmers’ share is 19 cents of every dollar that consumers spend on food.

All of this is sure to cause some changes in consumers’ buying patterns. Retailers are already seeing increases in coupon use, more shifting from national brands to store brands, buying down — from steaks to chops, for example. “That is actually good news for pork,” a retailer told me, “as pork is a better value product than beef.”

So whether you view these changes as good or bad, the reality is that this is a record-setting year. The food structure will again find a balance, just likely at a different level.