Another WSJ Ethanol Article
Posted: Apr 16th, '07, 12:25
This is from today's Wall Street Journal:
Ethanol Push Adds to Forces Lifting Food Costs
By UREN ETTER and JULIE JARGON in Chicago and CONOR DOUGHERTY in New York
April 16, 2007; Page A2/Wall Street Journal
Americans face sizable increases in their grocery bills this year as a boom in ethanol production diverts more corn from the nation's dinner table to its gas tank. Indeed, their pocketbooks could feel the pinch for years to come.
High corn prices, bad weather and steep energy costs have combined to make food a bigger potential contributor to inflation this year than it has been at least since 2004, when a cutback in dairy production boosted dairy prices and beef prices rose as mad-cow disease disrupted trade.
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. But Michael Swanson, an agricultural economist at Wells Fargo & Co., thinks the rise could be an even sharper 4.5%.
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."
Others also expect food inflation to persist. "Consumers are going to feel it at the meat counter first, and they'll see marginal increases in other food products for awhile, but we see the price increases lasting for a period of years," says Cal Dooley, president and chief executive of the Grocery Manufacturers and Food Products Association.
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.
Corn is hovering around $4 a bushel, the highest price in nearly a decade, amid competing demand from feed lots, food manufacturers and a burgeoning ethanol industry. The high price has created a cost squeeze for many food producers. Corn is used to fatten livestock, make processed foods like snacks and cereals and in the high fructose corn syrup that sweetens most soda pop.
But higher corn prices aren't the only force behind higher food prices. Blizzards that swept the Midwest this past winter left many ranchers with fewer cattle than normal. Ice storms hit California fruit and vegetable growers, ruining orange groves, avocado trees and strawberry fields. And food companies, many of which have cited corn prices in their recent decisions to raise prices, are also being buffeted by rising costs for other commodities, as well as higher transportation, labor and energy costs.
As food companies face these higher costs, they are also coming under increasing shareholder pressure to lift profits. With the consolidation of grocery chains and the rise of powerful and cost-conscious buyers like Wal-Mart Stores Inc., food companies have lost lots of their former pricing power. For them, "the increase in commodity prices provides a good excuse to increase prices," says Burt Flickinger, managing director of Strategic Resource Group, a food-industry consulting firm in New York.
'There's been a lot of opportunism," says Rick Tolman, chief executive officer of the National Corn Growers Association, who says "retailers are taking advantage of corn-price increases to justify price increases."
He adds that at $4 a bushel, corn only accounts for about five cents of the cost of a 12-ounce box of corn flakes and 10 cents in a six-pack of soda pop.
Even so, higher corn prices are clearly having an impact. They have sharply increased the cost of livestock feed -- typically a blend of corn and soybeans -- and a major component of meat production costs.
Nationwide, high feed costs, among other factors, are adding $30 per head on average to the price meatpackers are paying for cattle, according to Cattle-Fax, a cattle marketing information service based in Denver. That makes the average price per head about $1,150. They are also encouraging farmers to send their animals to slaughter sooner. The average slaughter weight of a beef cow has fallen to 771 pounds this year from 782 pounds last year.
At Paulina Meat Market, a gourmet butcher shop in Chicago, owner Bill Begale says the price he pays for meat has gone up since the beginning of the year, and all his suppliers blame higher corn prices. For example, he says, he is paying 75 cents a pound more for boxed beef, bringing the total cost per pound to about $6.70. As a result, Mr. Begale has raised his selling price for steaks, ground beef and lamb shanks by about 3%. "I had to raise my prices," says Mr. Begale. That's consistent with government data released last week showing that the wholesale price of beef jumped 4.1% last month, following spikes of 4.2% in February and 3.3% in January.
Tyson Foods Inc., one of the largest U.S. chicken producers, has increased prices to its retail and food-service customers three times in the past year. "As more corn is being used for ethanol production, prices have gone up significantly," said CEO Dick Bond at Tyson's annual meeting in February. "We have no choice but to pass along the higher costs to our customers who then pass along their higher costs to consumers."
Kellogg Co. has increased the price of some of its cereals and frozen waffles in recent months and other food companies, citing higher corn, wheat and other commodity costs, have done the same. H.J. Heinz Co. has raised prices on frozen potatoes and other products. Kraft Foods Inc. has been raising prices on cookies and crackers. It's even getting more expensive to chew gum. Cadbury Schweppes PLC and Wm. Wrigley Jr. Co. last month announced plans to raise gum prices.
At Dinkel's Bakery in Chicago, which specializes in bundt cakes and strudels, owner Norm Dinkel is watching prices closely. He says that he has seen modest increases in cake-flour prices -- about three cents a pound -- and a tripling of the price of nonfat milk powder, a key ingredient in his danishes. So far, he hasn't passed those increased costs along to his consumers. But he says he will have to consider doing so if the price of milk, eggs, sugar, butter and flour turn sharply higher.
When farmers were making their planting decisions last season, they underestimated the demand for corn, shifting four million acres from corn to soybeans. At the time, corn prices were lower, having yet to signal the heavy demand from ethanol producers or the export market that have developed since. Even so, American farmers harvested the third-biggest U.S. corn crop on record.
This year, the market is giving farmers a strong incentive to expand their corn plantings. Last month the government estimated that farmers will plant nearly 91 million acres of corn -- the most since 1944. However, their plans to plant fewer hectares of soybeans and wheat are pushing up prices of those commodities.
To combat the idea that corn growers are wreaking havoc on the economy, Mr. Tolman, of the Corn Growers Association, says he tries to paint corn in a more positive light. "I have people at church stopping me saying ethanol's driving up chicken prices," he says.
[b][/b]
Ethanol Push Adds to Forces Lifting Food Costs
By UREN ETTER and JULIE JARGON in Chicago and CONOR DOUGHERTY in New York
April 16, 2007; Page A2/Wall Street Journal
Americans face sizable increases in their grocery bills this year as a boom in ethanol production diverts more corn from the nation's dinner table to its gas tank. Indeed, their pocketbooks could feel the pinch for years to come.
High corn prices, bad weather and steep energy costs have combined to make food a bigger potential contributor to inflation this year than it has been at least since 2004, when a cutback in dairy production boosted dairy prices and beef prices rose as mad-cow disease disrupted trade.
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. But Michael Swanson, an agricultural economist at Wells Fargo & Co., thinks the rise could be an even sharper 4.5%.
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."
Others also expect food inflation to persist. "Consumers are going to feel it at the meat counter first, and they'll see marginal increases in other food products for awhile, but we see the price increases lasting for a period of years," says Cal Dooley, president and chief executive of the Grocery Manufacturers and Food Products Association.
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.
Corn is hovering around $4 a bushel, the highest price in nearly a decade, amid competing demand from feed lots, food manufacturers and a burgeoning ethanol industry. The high price has created a cost squeeze for many food producers. Corn is used to fatten livestock, make processed foods like snacks and cereals and in the high fructose corn syrup that sweetens most soda pop.
But higher corn prices aren't the only force behind higher food prices. Blizzards that swept the Midwest this past winter left many ranchers with fewer cattle than normal. Ice storms hit California fruit and vegetable growers, ruining orange groves, avocado trees and strawberry fields. And food companies, many of which have cited corn prices in their recent decisions to raise prices, are also being buffeted by rising costs for other commodities, as well as higher transportation, labor and energy costs.
As food companies face these higher costs, they are also coming under increasing shareholder pressure to lift profits. With the consolidation of grocery chains and the rise of powerful and cost-conscious buyers like Wal-Mart Stores Inc., food companies have lost lots of their former pricing power. For them, "the increase in commodity prices provides a good excuse to increase prices," says Burt Flickinger, managing director of Strategic Resource Group, a food-industry consulting firm in New York.
'There's been a lot of opportunism," says Rick Tolman, chief executive officer of the National Corn Growers Association, who says "retailers are taking advantage of corn-price increases to justify price increases."
He adds that at $4 a bushel, corn only accounts for about five cents of the cost of a 12-ounce box of corn flakes and 10 cents in a six-pack of soda pop.
Even so, higher corn prices are clearly having an impact. They have sharply increased the cost of livestock feed -- typically a blend of corn and soybeans -- and a major component of meat production costs.
Nationwide, high feed costs, among other factors, are adding $30 per head on average to the price meatpackers are paying for cattle, according to Cattle-Fax, a cattle marketing information service based in Denver. That makes the average price per head about $1,150. They are also encouraging farmers to send their animals to slaughter sooner. The average slaughter weight of a beef cow has fallen to 771 pounds this year from 782 pounds last year.
At Paulina Meat Market, a gourmet butcher shop in Chicago, owner Bill Begale says the price he pays for meat has gone up since the beginning of the year, and all his suppliers blame higher corn prices. For example, he says, he is paying 75 cents a pound more for boxed beef, bringing the total cost per pound to about $6.70. As a result, Mr. Begale has raised his selling price for steaks, ground beef and lamb shanks by about 3%. "I had to raise my prices," says Mr. Begale. That's consistent with government data released last week showing that the wholesale price of beef jumped 4.1% last month, following spikes of 4.2% in February and 3.3% in January.
Tyson Foods Inc., one of the largest U.S. chicken producers, has increased prices to its retail and food-service customers three times in the past year. "As more corn is being used for ethanol production, prices have gone up significantly," said CEO Dick Bond at Tyson's annual meeting in February. "We have no choice but to pass along the higher costs to our customers who then pass along their higher costs to consumers."
Kellogg Co. has increased the price of some of its cereals and frozen waffles in recent months and other food companies, citing higher corn, wheat and other commodity costs, have done the same. H.J. Heinz Co. has raised prices on frozen potatoes and other products. Kraft Foods Inc. has been raising prices on cookies and crackers. It's even getting more expensive to chew gum. Cadbury Schweppes PLC and Wm. Wrigley Jr. Co. last month announced plans to raise gum prices.
At Dinkel's Bakery in Chicago, which specializes in bundt cakes and strudels, owner Norm Dinkel is watching prices closely. He says that he has seen modest increases in cake-flour prices -- about three cents a pound -- and a tripling of the price of nonfat milk powder, a key ingredient in his danishes. So far, he hasn't passed those increased costs along to his consumers. But he says he will have to consider doing so if the price of milk, eggs, sugar, butter and flour turn sharply higher.
When farmers were making their planting decisions last season, they underestimated the demand for corn, shifting four million acres from corn to soybeans. At the time, corn prices were lower, having yet to signal the heavy demand from ethanol producers or the export market that have developed since. Even so, American farmers harvested the third-biggest U.S. corn crop on record.
This year, the market is giving farmers a strong incentive to expand their corn plantings. Last month the government estimated that farmers will plant nearly 91 million acres of corn -- the most since 1944. However, their plans to plant fewer hectares of soybeans and wheat are pushing up prices of those commodities.
To combat the idea that corn growers are wreaking havoc on the economy, Mr. Tolman, of the Corn Growers Association, says he tries to paint corn in a more positive light. "I have people at church stopping me saying ethanol's driving up chicken prices," he says.
[b][/b]