Common Tragedies

Thoughts on Environmental Economics

Getting what you pay for: food & energy prices

Posted by Sarah Darley on April 15, 2008

In a relatively recent post, Rich asks how food and energy are different.  His implicit point (and I agree) is that in many ways they’re not that different.  My preliminary thoughts on why escalating food prices haven’t been getting as much press are: 1) oil is “sexy” in the sensationalist media sense of the term, food isn’t “sexy” until we start talking about riots and starving children, 2) the component of rising food prices that is related to rising energy prices suggests an inherent lag – energy prices are leading food prices, and 3) there may be some variation in the degree of regressivity in rising food prices versus rising gas prices.

I expand on number 3 and offer some other thoughts below…

First of all, let’s dig a little deeper into the issue of food vs. energy expenditures.  Rich mentions that Americans spend 3X as much of their income on food as they do on gas, but I think there’s some detail here that can be explored.  Breaking down the BLS data cited by Rich, I notice that only 56% of total food expenditures are spent on food at home, and, of this, 63%, or $2,154, is for foods most likely to be affected by recent price trends (including cereals/baked goods, meats/eggs, dairy, sugar/sweets, fats/oils, and non-alcoholic drinks).  This number is in-line (and actually slightly below) the $2,227 spent on gas.

While the percentage increases in gas prices from 2006-2008 are on the same order of magnitude as increases in retail food prices,* there are some interesting differences in commodity versus retail price trends.  For oil, the per barrel price has increased 54% from 2006 to 2008** while food commodities like corn and wheat have experienced price increases (per bushel) in the triple digits over the same period, 140% and 222%, respectively.  I raise this issue only to note that there are some complexities of pass-through to the consumer – the retail price increases on gas at the pump and white bread are similar in magnitude (23% and 22%, respectively) but represent very divergent trends in terms of the degree of commodity price increases that an end user must bear.

Coming to the issue of regressivity, as this blogger/commenter puts it so eloquently: “I’m constantly complaining about how poor people get f*cked more by high energy prices than rich people, but they get f*cked even harder by food prices.” [asterisks not in original]  I’m not quite sure how to balance my thoughts here, but basically I’m thinking that the squeaky, middle-class, suburban wheels (attached to an SUV) are getting the grease from the media on oil prices while food prices don’t seem to slap them in the face (or wallet) as much.  Ultimately, I’m just saying it’s important to consider variations in transport expenditures (public transport vs. personal cars) and food expenditures by income when thinking about this issue.

I think there could also be some behavioral economics issues here – we’re bombarded by gas prices on every street corner and many people purchase gas at least once a week.  I realize many people also purchase milk or eggs once a week but I think there might also be some aggregation/disaggregation issues: gas is a single-product purchase while a trip to the grocery store involves purchasing many goods meaning the consumer may not be as focused on the price of any one product.

Moving on to some more tangential thoughts on the subject of food prices…

Thanks to Daniel for pointing out Paul Krugman’s thoughts on the matter of rising food prices.  Krugman helps to frame the issue as one of increasing demand for meat, lack of climate change policy, (illusory) expectations of an active and functional world market for grains, war-mongering in Iraq (and other issues related to oil prices), and increasing (and over-stated/artificial) demand for biofuels.  While I appreciate Krugman’s framework (depressing as it may be), his statement that “people are starving in Africa so that American politicians can court votes in farm states” pisses me off.  It’s really not that simple.  I’m not condoning America’s corn ethanol policies by any means, but to reduce the questions and challenges of international food aid to the greed of the American corn lobby seems a vast oversimplification.  You might put it this way: people were starving in Africa before corn hit $3 a bushel.  My impression is that Krugman’s whole point with his article is that interdependencies and complexities in world markets (and climate systems) have been vastly under-estimated.  So instead of blaming farm state politics in the US, why don’t we pause for a second and think about how issues of conflict management, free trade, and climate change might also be affecting international food aid?

And, since I’m on my soap box, just one more thing: I understand Rich is dismissing the potential market opening for “feel-good” local/organic foods from a strict accounting perspective, and I can respect his perspective, although I’m not certain that I share it.  One component of the philosophy supporting “feel-good” products like local/organic foods or renewable energy is that you should pay for what you value.  A key similarity between food and oil markets is the degree of market interventions for these products (subsidies, tax credits, etc.).  Using the “pay for what you value” framework, the reason for this is that society values things like cheap food, cheap gas, and happy, albeit monoculture-addicted, farmers (or agribusiness corporations).  However, one might argue that if what society really values are food accessibility (nationally and internationally), a robust and diverse agricultural sector, and sustainable energy systems, we should be willing to pay for them and we should also demand prices that reflect the societal value (and costs) of the product in question.  Lest I err too much on the side of the foodie elite, let me end with this thought from Kim Severson’s April 2 NYT piece:

If the American shopper decides cheap food is the most important thing, the intellectual musings of the food elite might be trampled in the stampede to the value menu.

*Data sources: EIA & BLS

**Data source: EIA

One Response to “Getting what you pay for: food & energy prices”

  1. Shannon said

    Hey this was an excellent post!

    The relationship between energy price and quantity is very simple. Food costs relating to energy prices are more abstract and also harder to calculate- the cost of peas went up a dollar at my grocery store this year but the cost of pierogies is the same. Thus I (average person) have a cognitive disconnect with the idea of energy being part of my food price and an inability to determine the cost impact even if I understand the concept of embedded energy cost in food.

    We are so attuned to the price of gasoline that we talk about it incessantly- who has the cheapest gas?

    But who has the cheapest peas? That is the question.

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