Price at the pump (food prices, part 3 of 4)
Fuel is a major expense for most Americans and especially for farmers and ranchers. They depend on fuel to run their tractors. Petroleum is the seedstock for synthetic fertilizers to grow healthy crops, and fuel powers the trucks that transport their goods from the field to the store.
“The biggest external factor right now is this enormous run up in petroleum prices. We have to continually re-price the agricultural complex, if nothing else, to make up for how much more it costs just to get this product shipped around from buyer to seller,” Sartwelle says. “Farmers’ input prices have gone up just as fast, if not faster, than the sale prices for their products.”
“Those prices are set based upon the perceived view of the market, and fear plays a large part in that. The more fear people see in a potential supply disruption, like from one of the larger Middle Eastern countries, the higher the price is going to be,” says Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University. “It’s not a factor of supply and demand—it’s a factor of the fear that supply and demand will be cut off at some point in the future.”
Yet Bullock assures that supply is not a current concern. Ample global reserves are available, which means prices should level out over time.
“Markets go up and go down. Demand and supply react accordingly. Prices react accordingly and eventually will come back down. That’s exactly what happened in 2008. This year, again, eventually the markets will react,” he adds.
In the meantime, as gasoline and diesel prices continue to rise, farmers and ranchers have little recourse in controlling this significant business expense.
“Especially for fresh agricultural goods, time to market is essential,” Bullock says. “It’s not like you can watch the price of diesel and transport your goods accordingly. You’ve only got a certain window of opportunity to harvest the crop, go to market and get it to the store. You are held hostage to those costs.”
Bullock also noted that additional stops in the production chain are feeling the pinch of rising fuel prices, and, as a result, each link passes on a portion of those higher costs to its customers. After a few links in the chain, it all starts to add up—and the consumer pays the balance in the end.
“The price of fuel can affect any number of those areas,” he says. “As it increases, it’s additive. It may only be a few cents in one area, but you add all of those areas up and all of a sudden your costs are up a third.”