Ethanol, Bad Weather & Rising Food Costs
The newest post from the WSJ on ethanol related food inflation, “Ethanol Push Adds to Forces Lifting Food Costs,” is a good article on the repercussions of the current ethanol initiative.
As I’ve described in previous posts, ethanol-driven inflation is on the rise:
“The Agriculture Department says that retail food prices are likely to climb by 2.5% to 3.5% in 2007, fueled in part by strong demand for corn-derived ethanol.”
“Food prices are already on the rise. The price of cereals and baked products increased 4.2% during the 12 months ended in February, according to the Labor Department. Meat, poultry and fish prices gained 2.7% over the same period.”
However, the article makes the excellent point that although economists (and the media) generally exclude food prices from their analysis of inflation (along with energy), this time around, unless policies change drastically, the high prices are here to stay.
“Food prices are volatile by nature, and economists generally shrug off such jumps because they tend to be offset over time by equally abrupt price declines. But Kenneth Beauchemin, a U.S. economist with consulting firm Global Insight, says that the difference now is that the government’s push to promote ethanol, unlike a storm or other temporary factor, “could affect prices for the next 10 years.”"
Over the short term, food prices are also likely to stay high for a number of non-ethanol reasons. The first reason is the bad weather we’ve been experiencing over the past couple of months including blizzards in the Midwest that reduced cattle stocks, and ice storms in California that reduced citrus production. The second reason is that food producers have started to pass on higher prices to consumers “taking advantage of corn-price increases to justify price increases.”
