KAI RYSSDAL: Ben Bernanke probably gets his economic indicators the old-fashioned way: reams of paper full of numbers telling him all he needs to know.
We’ve got something more immediate we like to use. It’s just around the corner here in our offices. We noticed this morning the price of corn chips in our vending machine went up 10 percent last time the guy came to restock. Sodas went up a dime. And those tiny little donuts? They were up almost 30 cents.
We’ve called economist Dan Basse to talk food prices. He runs the forecasting firm AgResource. Dan, thanks for being with us.
DAN BASSE: Ah, you’re very welcome, Kai.
RYSSDAL: So, our experience at the vending machine here down the hall is anecdotal, to be sure. But is it at all indicative of what’s happening with food prices? Are they sort of rising, just a bit?
BASSE: Well, I think they are, Kai. I think as we look across the spectrum, for the first time in at least the past year, retailers are willing to pass along the higher costs of raw material. And by that I’m saying, you know, whether it’s corn and corn chips, or starch made from corn, or beef or pork, or any of the other ingredients that are tied to agriculture, most of them are moving upwards. And so it’s not only a phenomena that you’re seeing at your vending machine, it’s something that’s being seen throughout the world.
RYSSDAL: You know, that’s interesting, because pricing power is not something that manufacturers — whether they’re in food or jeeps — have really had for years now.
BASSE: No. You really have to go back to late 70s, early 80s before you had this kind of pricing power. And, seems strangely enough, but a lot of this pricing power comes from the energy markets. If you go back and correlate rising energy prices to rising food prices, there seems to be a very strong relationship. And this is only, of course, emphasized by the Bush administration’s christening of ethanol as being a way to get off Mideast oil. But on the sidelines, we’re seeing a dramatic increase in caloric intake from southeast Asia due to their rising disposable incomes. Not surprisingly, the first thing that someone would do in India or China when they make a few extra renminbi would be to spend it on improving their diet. And that is what’s going to really fuel, we think in the future, higher food prices and something in the vicinity of 10 or 20 percent over the next couple of years.
RYSSDAL: Let me make sure I understand this. Rising Asian demand as we all know has led to higher prices for things like oil, commodities like steel. Now you’re telling me that food prices here are gonna go up because Asian demand is higher as well.
BASSE: Well that’s right. I mean, when you look at the land mass of China, for instance, variable land mass, land that can be put into production . . . it’s been shrinking based on their urban sprawl, like it has been in many countries. So the Chinese have to rely, very much so, on rising yields to meet their demand. The Chinese have not been able to do it. They’ve seen their grain stocks fall dramatically in the last several years. And in fact, they’ve now been slowing exports. They do export a little bit of corn, but they’ve been, of course, massive buyers of things like soy bean oil, soy beans. Things that, of course, related to livestock and to their diet. The Chinese have a hog heard that’s about 490 million head. That compares to we here in the United States at around 61 million head. So it’s a dramatic increase, and all of those animals go to, of course, eating grain. And of course, that has a phenomena of raising price.
RYSSDAL: Is this a one-time spike, or are we on the leading edge of just a rising trend in food prices?
BASSE: As long as energy prices stay higher, and as long as this administration and much of the world wants to embrace a green bias — and it’s hard to find a politician that doesn’t want to be green — I think that that, along with the rising disposable income in southeast Asia — I’ll call it the flattening of the world economic landscape — implies to us, anyway, that food prices will be moving upwards. But please understand that in a loaf of bread, there’s maybe 4 cents of wheat. So if the wheat price doubled to 8 cents, you and I wouldn’t notice it all that much. It’s a combination of energy — including packaging and transportation — that causes a retailer and wholesaler to pass those price increases along.
RYSSDAL: Dan Basse is an economist. He’s also the president of AgResource, that’s a forecasting firm in Chicago. Mr. Basse, thanks a lot for your time.
BASSE: You’re very welcome.
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