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July 2004

Factors Beyond the Farm Gate Affect Food Prices

Bob Stallman
American Farm Bureau
By Bob Stallman
President, American Farm Bureau

Farmers and ranchers rightfully take pride in supplying America’s consumers with the most varied, abundant and safest food supply in the world. The quality of life that many Americans enjoy is bolstered by the fact that we produce this bounty efficiently, which is reflected in food prices here being the world’s most affordable.

During the past several weeks, however, there has been a little upward blip on the food price radar screen. While it is true that some American farm and ranch families are currently receiving more money at the farm level for the food items they produce, there are several aspects beyond the farm gate that play a larger role in determining prices at your grocery store.

For the most part, farmers do not set prices for raw food commodities. Farm-level prices are largely determined by supply and demand. While the costs of tools, energy and materials we use to grow food also are higher, under our system of economics we are usually unable to pass along those costs. Higher production costs, also dictated by supply and demand, usually come directly out of our bottom lines.

The Farmer’s Share

Overall, the money farmers receive for raw food commodities does not cause that big of a ripple in final retail costs. As farmers, we receive a relatively small share of the overall consumer food dollar – less than 20 percent on average for all product types in recent years. A good example is a $1 loaf of bread, which contains only about a nickel’s worth of wheat.

Looking beyond the farm gate, energy prices are one of the biggest factors right now. Most of us are paying more to fuel our cars, trucks and tractors. But higher energy prices also mean that transporting, processing, packaging and distributing food costs more as well. These costs, which are incurred after raw commodities leave our farms, can be and often are passed along by food processors and retailers. There’s nothing wrong with passing along these costs when possible – it’s all part of the American economic system.

Another factor driving increased demand is that more Americans than ever are giving high-protein diets a shot in their never-ending efforts to lose weight. This trend has contributed to higher retail prices in the livestock sector. In fact, demand for beef is now at an all-time high, while the U.S. cattle herd is the smallest it has been since the 1950s.

Consumer demand for milk and dairy products has also been on the rise. However, farmers can’t add cows and increase milk production overnight. The current stronger demand for cheese is weighing heavily against milk supplies that have not grown much since 2002. Consumers should rest assured, however, that we will work ourselves through this dairy shortfall, as we have done in the past.

Global Forces Contribute

Global economic forces also can contribute to rising food prices here. Most livestock eat soybean meal as a protein source. However, worldwide demand for soybeans currently is outstripping supply due to South American production decreases. U.S. farmers who grow livestock are paying more for grain because global soybean prices have increased. It’s also true that when farmers have to pay more to feed livestock, their ability and/or willingness to increase herd size drops.

It’s been said that the cure for high prices…is high prices. In other words, America’s farmers and ranchers are some of the world’s most productive and they respond to market signals. Barring a weather problem, our farmers will rally with a boost in production.

Our national farm policy provides farmers the flexibility we need to respond to these market signals. Our farm program is working and at a level that is considerably below budget. That should be kept in mind when new ideas to “reform” farm policy are suggested.

Until farmers respond to today’s market signals – as they will – America’s consumers can find solace in the fact that food prices in the United States have been, and will continue to be, one of the best deals around.