One of my brothers has worked in the trucking industry for years. When diesel prices began their meteoric rise, I asked him if higher fuel costs weren't affecting his business?
“No,” he replied. “We have fuel adjustment clauses written into all our contracts. When the price of fuel goes up, the charge per mile goes up. The higher prices aren't affecting us at all.” As anyone who travels the highways knows, no shortage of trucks exists even as diesel approaches $5 per gallon. That's a good thing because without them the nation's supply of fruits and vegetables and countless other goods would dry up.
What is less obvious is the role fuel adjustments are playing in food prices. The cost of trucking fresh produce from California, Florida or Mexico or frozen vegetables from Bells, Tenn., or ethanol from the Midwest has become a major component in the cost of food.
But, for reasons unknown, organizations such as the Grocery Manufacturers Association and beef and pork producers have zeroed in on alternative fuels like ethanol and biodiesel as the culprit behind rising food costs.
Some of the claims have been laughable. One company announced it was raising the price of its snack treat products 5 percent because of “skyrocketing” wheat prices. U.S. Wheat Associates economists calculated the market price of the wheat in the product was less than 5 percent of its cost.
In response to questions from New Mexico Sen. Jeff Bingaman, the U.S. Departments of Agriculture and Energy released an analysis of the increased U.S. consumption of ethanol and biodiesel impact on food prices.
The 16-page report found expanded ethanol and biodiesel consumption may have increased the Consumer Price Index for all food by 0.10 percent to 0.15 percent in 2007 or ethanol and biodiesel use accounted for 3 percent to 4 percent of the increase in retail food prices. During the first four months of 2008, it was 4 percent to 5 percent.
“Over time, livestock and dairy producers will adjust to higher feed costs by reducing production,” the report said. “In future years, production adjustments by livestock and dairy producers in response to higher feed costs resulting from ethanol and biodiesel expansion could add a total of 0.6 to 0.7 percentage point to the CPI for all food.”
That's not meant to minimize the difficulty faced by livestock producers, but as Pioneer Hi-Bred International Chairman Dean Oestreich noted last fall, corn farmers struggled through the 1980s and 1990s with prices around $2 a bushel. Until recently, cattlemen and hog producers were enjoying high prices — and cheap feed.
The concern now should be the situation in Iowa, Illinois and Indiana where floodwaters have led to mandatory evacuations in Des Moines, Cedar Rapids and Waterloo in Iowa. The flooding has pushed corn futures above $7 per bushel for the first time. The resulting production losses when grain demand is so high — coupled with the loss of life and property — could be a real tragedy.