I recently read an interesting analysis by an
economist that suggested the price of corn is actually too low. With all the
talk this summer about how the high corn prices are increasing food costs, I
was surprised and interested in this counter-intuitive opinion. The analysis
compare the real price (in other words the price adjusted for inflation) of
corn, beef, oranges and oil during the past 20 years. The showed the real price
of corn is actually less than it was 20 years ago, while the cost of oil has
skyrocketed. It leads me to believe perhaps ethanol’s been catching the blame
for rising food costs, when oil prices driving up transportation and processing
costs are the real culprit. You can read the entire analysis here.
Is the Price of Corn too LOW? J.S. McLaren
There’s been a lot of discussion over how corn costs are affecting food prices.
And while news coverage abounds about the price of corn pinching consumers’ pocketbooks at the cash register, an analysis actually shows the price of corn may be too low.
Skyrocketing interest in and the use of ethanol in the past two years has had a strong impact on corn prices. However, the $2 to $4 price change in corn simply isn’t the accurate cause for the massive inflation in the food chain. Consider that a 14 oz. box of corn flakes contains just 3 cents worth of corn. Even a doubling of the corn price would drive only a small change in the consumer price.
To further drive this point, I generated a data-based analysis of four consumer goods, transforming their nominal prices over the past 20 years to real dollars – constant dollars excluding the influence of inflation – using the Consumer Price Index.
Results in the chart were obtained by: Annual nominal prices for the past 20 years were obtained from the U.S. Bureau of Labor Statistics, USDOE, and USDA. Transformation to real dollars (inflation-adjusted constant dollars) was achieved using the Consumer Price Index. The four items under review were then indexed to be equal 20 years ago (1988 = 100). The relative position and trend in each line shows where the price is today and the comparative historical change in real terms (excluding the influence of inflation).
The results show that, even with the recent corn nominal price increase, the real price is below other foodstuffs, and dramatically below that for crude oil.
The first striking fact is that the price of corn is lower than it was 20 years ago, and except for the past year, it has been declining in real-terms. Clearly, corn price has not kept up with the general level of inflation. It begs the question, is the price of corn too low compared to the value for all its possible uses? The second fact is that since about 1999, the real price of oil has increased dramatically, especially relative to corn. We included beef since cattle eat corn, although these days they also eat the protein-rich residue left-over after making ethanol from corn. The real price increase has also been below inflation for beef, albeit higher than corn. Oranges were included in the analysis because they are completely independent of corn. Real price spikes occur, such as in 1999, likely due to freeze conditions, but generally the relative price change is slightly above consumer price index for inflation and is much higher than for corn.
Looking at the facts, it is simply inaccurate to think corn price increases have a large impact on food prices. In fact, it suggests that corn has been underpriced, especially considering the market value of it as a replacement for crude oil. If you value corn at the comparative increase crude oil has experienced in the past 20 years, corn would average $13.50 per bushel! Perhaps this might shed some light on the relevance of debating $2 or $4 or even $6 per bushel, especially when considering such societal values as home-grown, safe, and cleaner-burning, renewable fuel.
The impact of the price of corn on grocery prices is becoming one of today’s most common myths. In fact, the data suggests the large increase in oil price may have more impact on food prices due to the costs of transportation and processing energy. It’s time to set the record straight.
Dr. J. McLaren is the Founder and President of StrathKirn® Inc., a technical analysis and business consulting company focused on new technology applications and emerging markets, across the agriculture, biotechnology, and biofuel industries.
The impact of the price of corn on grocery prices is becoming one of today’s most common myths. In fact, the data suggests the large increase in oil price may have more impact on food prices due to the costs of transportation and processing energy. It’s time to set the record straight.
Dr. J. McLaren is the Founder and President of StrathKirn® Inc., a technical analysis and business consulting company focused on new technology applications and emerging markets, across the agriculture, biotechnology, and biofuel industries.