AgDM newsletter article, October 2007

Energy agriculture - food versus fuel

Don HofstrandDon Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu

Eighth 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 around 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 agriculture commodity prices are rising due to the bio-fuels industry, 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 1961 to 10 percent in 2006. 

At 2006 levels, the impact of a ten percent increase in food expenditures due to high food prices will require only one percent of disposable income.

Share of the food dollar that goes to production agriculture

The share of the food dollar that goes to farmers has decreased from 37 percent to 20 percent in the last 50 years as shown in Figure 2. The large increase in ready-to-eat food is an indication of the increase in the non-farm share of the food dollar. However, even with these increased costs, the portion of consumer’s disposable income that goes for food purchases continues to decline as shown in Figure 1.

Figures 1 and 2

If 10 percent of consumer’s disposable income goes for food purchases, and 20 percent of the money for the purchases go 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.

The farmer’s portion of the food dollar varies greatly depending on the food item. As shown in Table 1, only two percent of the sale price of potato chips and cereal goes to farmers while 45 percent of the sale price of milk goes to farmers. Bacon and eggs are 16 and 30 percent respectively, if you prepare them at home. If you eat at a restaurant, it will cost you more and the percentages will be lower.

Table 1

Food waste

The amount of food that is produced but never consumed is surprisingly high. Some research indicates that slightly over 25 percent of our food supply is not consumed and disposed of somewhere along the food supply chain. Other estimates are higher. Table 2 shows the estimated food loss at the retail, food service and consumer levels for different food categories. Several of them are over 30 percent.

Table 2

Food waste examples can easily be observed in the typical home and at restaurants and buffets. Because food is so 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. Because food is cheap, increasing portion sizes is an inexpensive way to attract customers, but causes greater food loss.

Not a zero-sum game

Agricultural production used for energy does not necessarily result in an equal loss of agricultural production for food. Agriculture has a long history of surplus production capacity. Government programs have been used to restrict production capacity and prop up prices. More recently, programs have focused on supporting farm prices while letting surplus production clear the market at depressed prices. This environment has not been conducive to stimulating investment in research and technology to expand production capacity.

With the emerging energy demand, agriculture enters a period which taxes its production capacity. Higher commodity prices are providing the incentive for making investments to expand agriculture’s production capacity. This will include:

The expansion of agriculture’s production capacity is difficult to estimate, but I suspect it will be greater than many people expect.

Whom do you want to support?

Crude oil and corn prices over the last 40 years are shown in Figure 3. During this period, the price of 100 pounds of corn (about two bushels) went from $2.02 to $3.96, an increase of 90 percent. During the same period, the price of a barrel of oil went from $2.92 to $58.30, an increase of 1,900 percent. This stark comparison explains why the energy sector has made much more money than the agriculture sector in recent decades.

Figure 3

Some say that agriculture should stick to making food and leave the energy business to the oil companies. But we live in a free-market, capitalistic society. The basic premise of this society is that businesses are free to deploy their resources where they will generate the greatest return. Through competition the consumer is better-off by having the highest quality products at the lowest price. So let the marketplace determine where agriculture’s bounty should be deployed. The marketplace has an excellent track record in serving the best interests of the consumer.

 

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