As food prices spike, decades old affordability trend reverses

Ethanol production partially to blame

January 11, 2013
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As food prices spike, decades old affordability trend reverses
Source: FarmEcon LLC

A study from FarmEcon says that food prices have been rising more quickly than prices of other goods since 2006, reversing a trend towards cheaper food that started after World War II. Food affordability, measured as the percent of income spent on food, has been decreasing in part due to a rise in the cost of raw commodities like corn. The report notes that the price of corn has risen in the face of increased production of ethanol and decreased overall production, especially following the 2005 advent of federal mandates for fuel ethanol production. Rising raw commodity prices have in turn led to an increase in the price of horticultural crops such as potatoes, strawberries and processing vegetable crops that compete with corn for land. Because farm commodity markets are price inelastic and their costs are at the base of the value chain, the price of converting these raw products to saleable goods is passed on to the consumer. According to the report, increased spending on food has meant less discretionary spending, contributing to the slow recovery of the US economy. Read the report here.

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