Introduction

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In the summer of 2007, higher prices at supermarket checkout lines have drawn the attention of consumers, the media, and politicians. During the first half of 2007, food prices rose by 6.2 percent and contributed to almost one-fifth (17 percent) of the total increase in consumer prices. Prices at the grocery store rose almost a third faster than food prices overall (both at restaurants and retail outlets), growing by 8.0 percent in the first half of the year. These trends are likely to continue. USDA estimates that consumer price increases for red meat, poultry, milk and eggs will stay above the general inflation rate from 2008 to 2010.  

Consumer anxiety over higher grocery prices is heightened by more modest wage and economic growth. During the first half of the year wages grew only a third as fast as food prices – 1.9 percent.   Overall economic growth was also relatively flat, at under 1 percent in the first quarter of 2007. Consumers are legitimately nervous when the cost of eating is rapidly outpacing the means of paying for food.

The food industry has been capitalizing on these fears by focusing on higher costs for one of their key ingredients: corn. Food and meat processing companies have blamed the increase in food prices on the increased price of corn, which is used as a basic ingredient in livestock feed and processed food. They claim that higher demand for corn by ethanol refineries is contributing to the increased corn prices. This summer’s protracted congressional debates over energy policy and the automotive industry’s relentless “Live Green, Go Yellow” advertising campaign may lend credence to these allegations in the minds of consumers.

These claims contain some truth that shields several decades of deception when it comes to the link between the price of corn and retail food prices. Although corn prices have risen over the past year in part as a result of increased ethanol demand, the correlation between crop prices and retail grocery prices remains elusive. The prices farmers receive for corn have risen this year, but over the past decade, the real price of corn has been extremely low.  During that period, livestock producers, slaughterhouses, and grocery manufacturers benefited from artificially low corn prices but did not pass these savings on to consumers. Now, food and meat processors are using the ethanol smokescreen to justify grocery price increases that are unlikely to decline when corn’s historically volatile price falls.

The reality is less simplistic than agribusiness interests suggest. Pundits and food and meat processors have lamented this year’s rise in corn prices with little attention to the long-term declining trends in the real price of corn. The implication that rising corn prices warrant grocery price hikes ignores the historical grocery price insensitivity to corn prices.  Over the past three decades, grocery prices have steadily trended upwards regardless of significant price volatility for corn. 

Food & Water Watch has examined and compared the monthly farmgate price of corn and retail price of ground beef, chicken, pork chops, and milk since 1980 and found:

• The Long-Term Farmgate Price of Corn Has Fluctuated Significantly and Has Predominantly Exceeded $2 Per Bushel: Contrary to media accounts, the farmgate price for corn has not been stable, nor has it remained at $2 per bushel. The nominal – non-inflation adjusted – farmgate price of corn has been above $2 per bushel 75 percent of the months between 1980 and 2006.  The average nominal farmgate price of corn since 1980 has been $2.37 per bushel, but that includes two agricultural recessions that required significant federal emergency intervention. During the 1980s and 1990s, including the farm crises, nominal farmgate corn prices were about $2.50 per bushel – or at least 50 cents higher than the $2 that the pundits contend is the baseline.
• The Real, Inflation-Adjusted Price of Corn Has Trended Downwards Since 1980: Commentators have entirely relied on the nominal price of corn to justify the contention that its price has remained in the $2 per bushel range.  But $2 was worth more at the beginning of the Reagan administration than it is nearly 30 years later. The real farmgate price of corn in 2006 dollars, taking inflation into account, has averaged $3.63 per bushel between 1980 and 2006. Moreover, the real price of corn has fallen sharply over the last three decades. In the 1980s, the real price of corn averaged $4.88 per bushel; during the 1990s, the real price of corn averaged $3.30 per bushel; and between 2000 and 2006, it averaged $2.31. This decline has coincided with a shift in U.S. farm policy to promoting overproduction of commodities.
• During Comparable Times of Farmgate Corn Price Increases, There Has Been Little Interplay with Retail Food Costs: Food & Water Watch examined four historical examples of farmgate corn and retail food prices when there were dramatic shifts in corn prices and found that food prices were completely unresponsive to changes in corn prices. In many cases, retail meat and milk prices rose even when the farmgate corn price declined. Even when corn prices rose significantly, retail meat and milk prices rose, but not as significantly as the increase in corn prices.  In many cases they rose less than the current increase in retail food prices. In fact, prior to the 1996 Farm Bill when the change in corn prices most mirrors the past fourteen months, farmgate corn prices more than doubled from $1.99 in November 1994 to $4.43 in July 1996, but the price of ground beef fell by 1.3 percent while the price of whole chicken and pork chops rose by only 7.5 and 7.2 percent, respectively.
• Retail Food Prices for Meat and Milk Are Disconnected from Farmgate Corn Prices: Three other case studies support the idea that retail grocery prices are insensitive or unresponsive to the cost of corn that is used to produce them.  In one example, corn prices rose three times faster than retail grocery prices. In two other examples, farmgate corn prices fell sharply, but most retail meat and milk prices grew modestly. This suggests that meat and milk producers are operating a sticky pricing scheme which allows prices to drift up when input costs rise but do not pass on savings to consumers when the costs of inputs fall.
• Farmer Share of Food Dollar Decreasing:  The share of grocery revenues going to farmers has been steadily declining for years. Instead, more of the grocery sales are going to branding and marketing every year.  Between 1984 and 2000, the share of domestic food dollars that went to farmers fell from 35 percent to 19 percent, according to USDA figures. If farmers received the same share of domestic food dollars in 2000 as they did in 1984, an additional $98.9 billion would have gone to agricultural producers instead of the agribusinesses marketing food to consumers.

This white paper reviews the current price environment and examines the empirical evidence between the prices farmers receive for their crops and the prices consumers pay at the supermarket. Certainly, corn prices have risen over the past eighteen months and increased demand for corn by ethanol refineries has tightened the supply of corn. Consumers know that they are paying more at the grocery store for the food they put on their families’ tables. However, the notion that higher corn prices justify hiking supermarket prices needs closer examination.

Food & Water Watch’s examination of historical farmgate and retail price trends disproves the allegation that there is a causal relationship between farmgate prices and retail grocery prices. In fact, in many cases there is not even a correlation between farm prices and grocery prices – in some cases corn prices increase and some meat and milk prices have declined. In other cases, corn prices fall steeply and some meat and milk prices continued to rise.

In part, this disconnect between farmgate prices and retail grocery prices reflects the failure of federal farm policy to ensure an equal footing for America’s farmers against the giant agribusiness companies that purchase raw agricultural products. Federal farm policy has promoted overproduction of basic farm commodities for the last 20 years. Overproduction drives down prices, which is bad for farmers but good for the meatpackers that feed their livestock cheap feed made from those commodities and the grocery manufacturers that buy cheap cereals and grains.  Simultaneously, there has been an intense concentration in the agribusiness sector. Fewer buyers are less likely to bid up the price for commodities and farmers are less likely to get decent prices for their crops.

The combination of federal policy promoting overproduction and low crop prices and agribusiness consolidation has concentrated the benefits of the farm and food system in a tiny number of special interest hands. Consumers do not see the alleged benefit of the agribusiness economies of scale. Retail consumer food prices generally continue to rise steadily with inflation – except when they rise faster than the overall inflation rate. Farmers have received historically low prices for their crops for most of the past decade and a declining portion of retail grocery sales actually make it back to the farm. Instead, the meatpacking and food processing industry can capture the benefit of low-priced farm goods by increasing retail prices regardless of their input costs.

The price of corn is not entirely responsible for the rising prices in the grocery store. An improved federal farm policy could address the imbalances in the agriculture sector and stabilize farmgate price volatility. As long as federal farm policy promotes overproduction and ignores agribusiness consolidation, farmers and consumers will be at the mercy of pricing decisions made by a few powerful agribusiness interests.

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