Posted by: Debby Durkee | April 30, 2011

Food prices go up, up, up.

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Food prices go up, up, up.

The CEO of Smithfield Foods of Virginia says that the cost of corn, which has sky-rocketed due to the mandate to use  greater amounts of ethanol (produced from corn) in our fuel supply, has made it more difficult for meat providers to bring to market a reasonably-priced product.  Unless there is a new food for pigs and cows, their costs will necessarily find their way into your prices at the grocery store and not just for meat alone. This is from Mary Kissel of the Wall Street Journal.

(C. Larry Pope) is the chief executive officer of Smithfield Foods Inc., the world’s largest pork processor and hog producer by volume. He doesn’t mince words when it comes to rapidly rising food prices. The 56-year-old accountant by training has been in the business for more than three decades, and he warns that the higher costs may be here to stay.

…politics indeed plays a large role, as Congress subsidizes favorite industries and the Federal Reserve pursues an expansive monetary policy.

Pope could be a character in Atlas Shrugged as he struggles to maintain a business that has thrived over the years and is now facing difficulties due to no fault of his own. Instead it is due to government regulation, subsidies, and basically politicians (on both sides of the aisle) punishing the producers. Pope has been at Smithfield for 30 years.

…given the burst of food inflation the world is living through. Mr. Pope is running a multibillion-dollar business in the midst of economic turmoil, and he has strong views about why prices are rising and what can be done about it.

… He boasts that Smithfield employs some 50,000 people, many of whom are high-school graduates and immigrants others would consider “hard to hire.” It’s a “good business” that “gives people a good start.”

It’s also a business under enormous strain. Some “60 to 70% of the cost of raising a hog is tied up in the grains,” Mr. Pope explains. “The major ingredient is corn, and the secondary ingredient is soybean meal.” Over the last several years, “the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago.” Which means every product that uses corn has risen, too—including everything from “cereal to soft drinks” and more.

What triggered the upswing? In part: ethanol. President George W. Bush “came forward with—what do you call?—the edict that we were going to mandate 36 billion gallons of alternative fuels” by 2022, of which corn-based ethanol is “a substantial part.” Companies that blend ethanol into fuel get a $5 billion annual tax credit, and there’s a tariff to keep foreign producers out of the U.S. market. Now 40% of the corn crop is “directed to ethanol, which equals the amount that’s going into livestock food,” Mr. Pope calculates.

He also believes that Federal Reserve policy, which is making the dollar worth a whole lot less, is part of the problem. Pope has approached his cost problems by downsizing, closing portions of his operation – processing plants and a slaughter house. He also hedged his higher costs by investing in the commodity markets. Still the 2-3 percent profit margin won’t last much longer.

A pound of sliced bacon costs $4.54 today versus $3.59 two years ago and $3.16 a decade ago, according to the Bureau of Labor Statistics. Ground beef is $2.72, up from $2.27 in 2009 and $1.74 in 2001. And it’s not just Smithfield’s products: “You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat,” he drawls. “Those are the four staples of what Americans eat in their diet. All of those are based on grains.”

… “Workers can share cars when the price of oil rises, he quips, but “you can’t share your food.”  Snip –

Not all companies will survive this economic whirlwind. Mr. Pope recalls what happened the last time there was a surge in corn prices, in 2008: “The largest chicken processor in the United States, Pilgrim’s Pride, filed for bankruptcy.” They “couldn’t raise prices, so their cost of production went up dramatically.” Could it happen again? “It darn well could!” Mr. Pope exclaims.

Food price inflation isn’t a problem confined to America’s shores. “This ethanol policy has impacted the world price of corn,” Mr. Pope says. The Mexican, Canadian and European industries have “shrunk dramatically. . . . We have an unsustainable meat protein production industry,” he says. “We’re built on a platform of costs, on a policy that doesn’t make any sense!”

…The ethanol industry would supply only 4% of the nation’s annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. “The subsidy has been out there since the 1970s,” Mr. Pope says. “If they can’t make themselves into a viable economic model in 40 years, haven’t we demonstrated that this is an industry that shouldn’t exist?”

So what’s the solution? First, Mr. Pope says, get rid of the ethanol subsidies and the tariff. “I am in competition with the government and the oil industry,” he says… Smithfield‘s economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn’t subsidized. “Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case,” he says. Imagine what would happen if the mandate and tariff were eliminated, too.  Snip –

Mr. Pope says the “losers” here “are the consumer, who’s going to have to pay more for the product, and the livestock farmer who’s going to have to buy high-priced grain that he can’t afford because he’s stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business ’cause he doesn’t have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It’s a dynamic that we can’t sustain.”

There’s much more at the link. Politicians and Utopians, who want to force their ideologies on the rest of us, force the rest of us to live with the consequences. Either businesses will shut down, layoff workers or move elsewhere if they think they can survive that way. It’s time to remove the requirements of ethanol from our fuel. It is not environmentally friendly – so that was a ruse all along. Ethanol is not good for your engine, so we’ll have to purchase new cars sooner as well. We certainly should not subsidize with our tax dollars something that ends up costing us more on both ends. Can we get rid of this insanity? Or will we look to Atlas Shrugged as our future? Please read it all here:

http://online.wsj.com/article/SB10001424052748704330404576291772245610028.html

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Responses

  1. The above is all true. There is however more than that. Get rid of paying for NOT planting farmground! There are people in this country that are not connected to farming, getting subsidies for ground that they own for not producing crops. This has been going on for years. I would like to blame O’vomit but this isn’t this guy’s fault. It’s time for the consumer to wake up.

    • Good point, Bob. What a ridiculous use of taxpayer dollars — paying for not producing. Talk about capitalism turned on its head! I’m sure those getting the payments aren’t all small farmers either…probably the big guys, the crony capitalists.

  2. Every problem, cultural, economic and fiscal in this country is due to one thing: Government intrusion into them…extra Constitutionally I might add. Every government program (that is out side of Constitutional limits), you can bet, is in some way rewarding a down statistic and penalizing an up statistic. You get more of what you reward and less of that you penalize. This government is actively working against the prosperity and ultimate survival of the nation.

    • Yes, Greg, as Ronald Reagan said, “Government is not the solution to our problem, government is the problem.” We need to make sure that accurate quote gets back into the current lexicon.


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