Effects of lower commodity prices on food consumers

Yesterday, CNBC ran a story about lower farm commodity prices

“As a strong U.S. dollar and bountiful harvest expectations weigh on agricultural commodities, wheat futures have fallen 11 percent this year while live cattle futures are down 10 percent. Meanwhile, soybeans are down 7 percent, corn is down 5 percent, and sugar futures have fallen by 12 percent—a sharp turnaround from just a couple of years ago, when a drought put severe pressure on crop yields.”

They asked me what this might imply for the food consumer.  Here's what I had to say.

“Still, Americans will not see an equivalent drop in the prices on supermarket shelves, at least not immediately.

”Agricultural commodities are an important component of food prices, but they often comprise a pretty small share of the overall food dollar,” commented Jayson Lusk, a professor of agricultural economics at Oklahoma State University.

Lusk says that the percentage of food prices comprised by the raw materials ranges from as high as 40 percent for beef, to 10 percent or lower for highly processed food products such as those made from corn, wheat and soybeans.

In other words, a 10 percent moves in wholesale oat, sugar, and corn price probably won’t impact the price you pay for a box of Lucky Charms.

Still, “20 to 30 percent [of the overall price made up by agricultural products] does matter, and to the extent those prices fall, we should see lower food prices,” Lusk said.”

and

“Taking the broader view, the story for consumers is distinctly positive.

”Americans spend 10 percent of their disposal income on food, which is about the lowest in the world, and lower than at any time in our nation’s history,” Lusk said. “We’re seeing a very long-term trend toward more affordable food for many.””

Distributional Effects of Selected Farm and Food Policies

The Mercatus center released a report yesterday that I wrote on the farm-to-consumer effects of food policies, focusing crop insurance subsidies, SNAP, and ethanol promotion.  

The federal government subsidizes the premiums farmers pay for crop insurance - often around 65% of the premium.  What effect does that have on farm and food prices?  Here's a summary:

“Federal crop insurance is a textbook example of concentrated benefits and diffuse costs. Most food producers and consumers receive some benefit from crop insurance through the direct subsidy and decreased food prices. Those who stand to benefit most from the program are best able to convince legislators to continue it. But taxpayers as a body, less able to advocate for their own interests, suffer a net loss as money is transferred from the pockets of all taxpayers through higher taxes to the pockets of producers and consumers of food, meaning people pay higher taxes rather than choosing to pay higher grocery bills. The $932 million in projected savings if federal crop insurance were ended represents the deadweight loss of subsidies: the economic cost of transferring money from many to some and the cost of the lobbying necessary to maintain the system.

Some farmers win from subsidies while other farmers lose. While farmers in the plains states that produce the bulk of the food insured by the government would lose money if the program were eliminated, farmers in western states such as California, Oregon, and Washington would benefit because products such as fruit, vegetables, and nuts, which are not heavily subsidized, would no longer be disadvantaged.

Consumers pay more in taxes rather than more at the grocery store. Consumers would pay higher prices for food if subsidized crop insurance were removed, but the benefit to taxpayers more than compensates for the higher food prices. Taxpayers have to pay about $1.80 for every $1 in lower food prices owing to federal crop insurance.”

I also find that SNAP (or food stamps) is a very inefficient form of farm support: for every dollar spent by taxpayers, farmers benefit by only one cent.  A reduction in demand for corn-based ethanol would reduce food - especially meat - prices, while hurting corn producers.  

Nightly Show on Food Policies

A colleague alerted me to this episode of the Nightly Show on Comedy Central.  The entire show focused on two food polices: restrictions on food stamps and minimum wage for fast food workers.  Maybe I'm getting old, but I didn't find much of it very funny.  Which is too bad, because I agree with the underlying premise of at least one of their arguments.  Which also happens to undermine their other argument.

First, the episode takes issue with state laws that would restrict what food stamp recipients can buy with the money they receive.  I've written before about how food stamp restrictions are unlikely to have much effect.  But, here they focus on the paternalism of it.  Should the government tell people what they should and shouldn't eat?

I'm somewhat sympathetic to the conservative argument that these are not "earned" dollars but rather a government handout, and as such the state might have some leeway in dictating how they're spent.  However, as I explain at the above link, the restrictions are really an allusion anyway in the sense that most recipients can "get around" them by simply reallocating their budget.  Moreover, if the government can assume the right to tell food stamp recipients what to eat, what's to stop regulators from assuming they know better how you and I should eat?  In short, we ought to respect the choices of others.  We may not agree with everyone's choices, but we live in a free country.  Give people the dignity of the presumption that they know best how to better their own situation with whatever resources they might have.  

The Nightly Show

In the second half of the show, they take on minimum wage.  I find this a bit ironic because the first half of the show repeatedly makes the case that we shouldn't tell people what they can and cannot do with their money (in this case money received by the state).   But, apparently when it comes to minimum wage, the government SHOULD tell people what they can and cannot do with their money (in this case money that employers have earned in the market).  You can't pay people a wage they'd willingly accept.  It's not a ban on soda, it's a ban on hiring low skill workers at a wage  equal to their marginal productivity.

The show also seem to miss the potential substitutions between labor and mechanization that will be hastened with higher worker wages.  As I said in a tweet  last week: Here's how I ordered at McDonalds the last time I was in France where minimum wage is ~12/hr

California's Water Problems

Kevin Williamson has an excellent article in the National  Review on how California is (and how it should be) dealing with it's drought-induced water shortage.

He frames the problem as one that should be familiar to any economist: how do we allocate a scarce resource.  He also makes the point that scarcity is a fact of reality that cannot be wished away or swept under the rug.  

About agriculture, he writes:

“Farmers, who by some estimates consume about 80 percent of the water used in California. Agriculture is a relatively small component of California’s large and diverse economy, but California nonetheless accounts for a large share of the nation’s agricultural output. Both of those things are, in a sense, the good news: If market-rate water costs were imposed on California farms, as they should be, then any higher costs could be passed along — not only to consumers, but up and down the supply chain — in a very large global market, where they should be digested more easily”

So, how should we allocate water?

“There are two possible ways to allocate water in California: The people in Sacramento, Governor Brown prominent among them, can pick and choose who gets what, with all of the political shenanigans, cronyism, inefficiency, and corruption that brings. Or Californians can get their water the same way they get most everything else they need and value: by buying it on the open market. This is an excellent opportunity to apply the cap-and-trade model that many progressives favor when it comes to carbon dioxide emissions, with an important difference: This deals with real, physical scarcity, not artificial scarcity created by regulation.””

More precisely, here's a route forward.

“As noted, the water-rights picture is complicated, but it is not so complicated that California could not 1) calculate how much water is available for consumption; 2) subtract preexisting claims; 3) auction off the remainder, with holders of preexisting water rights allowed to enter that market and trade their claims for money. A gallon of water used to green up a lawn in Burbank and a gallon of water used to maintain a golf course in Palm Springs and a gallon of water used to irrigate almonds in Chico would be — and should be — on exactly the same economic and political footing.”

To the extent one is worried about the poor being able to afford water, use block rate pricing or take some of the receipts from the sale of water and re-allocate to the poor to let them decide whether it is worth buying.  

Impotence or Death?

Last week I was in Italy teaching a short course and speaking at a conference.  At the conference, I attended a session where the author described an an experiment on alcohol warning labels.  He had people choose between different bottles of wine that had different warning labels.

I thought this was a bit of a strange experiment because once you've seen one bottle with a warning label, doesn't it tell you something about all the bottles?  When I voiced this concern, my friend Maurizio Canavari pointed out that in Italy, different cigarette packages have different warning labels (apparently determined at random).

He sent me this picture yesterday, which reminds me of the joke he told me after the session.  A man walks into a tobacco shop and asks for a pack.  On his way out, he notices the warning label on the pack says that smoking may cause problems in the bedroom (e.g., see the above label "Il fumo riduce la fertilita").  He goes back in and hands the pack back to the shop owner and says: I'll take the one that just kills you.

Seriously, I wonder about the effectiveness of spreading information out over multiple packs vs. trying to cram it all on one.  And, I do wonder if people are more/less likely to pick packs with certain labels despite the fact that the labels warn about smoking in general and not about the effects of one particular pack or brand over another.