Co-Director – Ag Marketing Resource Center
Iowa State University email@example.com
(first in a series)
Agriculture has traditionally had a single focus of providing food for U.S. consumers and others internationally. However, with the emergence of the bio-fuels industry, production agriculture needs to serve two masters, food and fuel.
Much controversy has centered on the “food versus fuel” issue. Proponents of the new dual focus believe that production agriculture can meet the needs of both masters. Opponents disagree. They assert that channeling a portion of agriculture’s production capacity to energy production will result in substantially higher food prices and possibly food shortages.
While there is little doubt that the bio-fuels industry has played a part in the surge in agriculture commodity prices, the magnitude of the impact on food prices and the consumer’s pocketbook may differ from what you expect. Here are some perspectives to keep in mind.
Share of Disposable Income that Goes to Food Purchases
The United States is very blessed that only a small portion of the consumer’s disposable income goes for food and beverage purchases. As shown in Figure 1, the portion of disposable income that goes for food and beverages declined from 18 percent in 1960 to 10 percent in 2007.
At 2007 levels, the impact of a ten percent increase in food expenditures due to higher food prices will require only one percent of disposable income for the average consumer.
During this period, the portion the food expenditures spent on food consumed away from home increased from 19 percent in 1960 to 42 percent in 2007. Despite this rise in food consumed away from home (consumption that requires more preparation, etc.), the disposable income spent on food expenditures declined by nearly half. This is a great credit to U.S. agriculture.
Share of the Food Expenditures that go to Production Agriculture
If we look specifically at food expenditures, we see in Figure 2 that the share of the food dollar that goes to the farmer decreased from 33 percent in 1960 to 19 percent in 2006.
The large increase in ready-to-eat food that requires more processing, preparation, packaging, marketing, etc. resulted in an increase in the non-farm share of the food dollar. As shown below, the largest portion of the consumer’s food dollar goes to labor. The portion that goes for packaging, transportation and advertising is almost as large are the farmer’s share.
If 10 percent of consumer’s disposable income goes for food purchases, and 20 percent of the money for the purchases goes to farmers, then farmers receive only two percent of consumer’s disposable income. So, as an example, a 50 percent increase in farm commodity prices will only increase food prices by 10 percent, and will only require an additional one percent of consumer’s disposable income.
As shown in Table 1, the farmer’s share of the consumer’s food dollar varies greatly depending on the type of food purchase. Food products requiring the most processing such as bread, potato chips and cereal contain the smallest amount of farm commodities. Conversely, food products requiring little processing like meat, milk and vegetables contain a larger amount of farm commodities.
Corn is a significant ingredient in bacon, milk, steak and eggs. So rising corn prices will have a significant impact on these prices. However, rising corn prices will have little or no impact on bread, chips, cereal, carrots or lettuce prices.
One of the negative aspects of U.S. agriculture’s success in providing a plentiful amount of low cost food is the emergence of large quantities of wasted food.
The U.S. food supply is so plentiful that it provides an estimated 3,800 calories per person per day (USDA, 1994 data). To provide perspective on this plentiful food supply, if the average person needs only 2,000 calories per day, the excess calories could provide the entire caloric needs for the people in the following countries:
4) Central African Republic
5) Democratic Republic of Congo (Zaire)
These countries have a total population of 276 million people and an area in central Africa approximately equal to that of the U.S.
A large portion of these excess calories are not actually consumed. They are discarded somewhere along the food chain from production to consumption. USDA estimates that 27 percent of our food supply is wasted at the retail, foodservice and consumer levels. The waste estimated by commodity is shown in Figure 3. This does not include waste created prior to reaching the end of the food chain (production, processing, etc.).
Food waste examples can easily be observed in the typical home and at restaurants and buffets. Because food is relatively cheap for the typical consumer, it is often easier to dispose of excess food than keep it for later. Also, food portion sizes in restaurants have increased substantially over recent decades, resulting in more waste. Most food waste, whether it originates from homes or restaurants, ends up in landfills.
According to a recent United Kingdom study, we throw away our weight in food every year. The study estimated that we discard almost one-third of the food we purchase for consumption in our homes as shown in Table 3. Only 6 percent is unavoidable waste, and another 6 percent could have possibly been avoided. The rest could definitely have been avoided.
Table 3. Food Waste from Food Prepared at Home – 2008 – United Kingdom Study
Although increased food prices create a hardship for low-income people, it only creates an inconvenience for the average U.S. citizen. Of the 10 cents of the consumer’s disposable income dollar spent on food, only 7 cents is actually consumed, the other 3 cents is thrown away. That is more than the 2 cents that goes to the U.S. farmer.
U.S. agriculture provides a plentiful and safe supply of food. It does this for a smaller portion of the consumer’s disposable income than any other country in the world. This success has created a situation where food is so cheap that an enormous amount is wasted. The case could be made that higher food prices would encourage consumers and foodservice businesses to management their food supplies better.
Based on the success of U.S. agriculture to supply its citizens with copious amounts of low cost food, it only makes sense to direct a portion of this capacity to our energy needs. Figure 4 shows the long-term price trend of corn, our major food feedstock, with crude oil, our major energy feedstock. Corn price has increased recently. However, to match the crude oil price increase since 1970, Iowa corn would currently be selling for $44 per bushel, substantially above the actual price of $7.00.
Granted, we cannot endanger our food production capacity by moving too rapidly to agricultural based bio-fuels production. But using a portion of this capacity for energy production is in the best interest of the U.S.
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