Food Prices: Why They're Going Up Again

Some of the recent estimates of Soviet grain requirements are frightening. --Federal Reserve Board Chairman Arthur Burns

He's easily frightened.

--Agriculture Secretary Earl Butz

From coast to coast, the summer sun is ripening record harvests of wheat, corn, oranges, apples, but, as any American housewife knows only too well, the price for those harvests is inexorably climbing. Overall, the price of food rose 1.2% during July, the government announced last week, pushing the Wholesale Price Index up at a stunning rate (see ECONOMY & BUSINESS). Beans, lettuce and other fresh vegetables were up 12% in some areas, while the overall increase in farm products, including hogs and poultry, was 6.6%. The reasons for these increases were intricate, but many Americans focused their anxiety and anger on one new element: the sudden Soviet orders for some 10 million tons of American grain. In typically blunt fashion, Burns predicted that the Russian purchases will cause consumer prices to rise "sharply." Butz insisted that the prices will climb, if at all, only "nominally." Who is right may not become completely clear until fall, but the outcome could well influence not just the price of a loaf of bread but also the 1976 presidential campaign.

Already, emotions are rising as economically interested groups argue the pros and cons of the new Soviet grain deals. Last week an ad hoc committee of the AFL-CIO maritime unions, which are threatening to boycott the Soviet shipment, met with Butz to protest the sales. "This sounds like the 1972 rip-off all over again, and we won't stand for it," said the Longshoremen's Thomas Gleason, referring to the Soviet purchase of 19 million tons of U.S. grain three summers ago. "Nobody is going to be ripped off," Butz assured the seamen. Said Don Woodward, president of the National Association of Wheat Growers: "It's the criticism of these sales to the Russians that'll bring on higher food prices, not the sales. All those complaints amount to an open invitation to jack up prices."

Record Crops. The argument readily stirs passions because each debater is at least partially right. The 1972 sales to the Russians did contribute substantially to an abrupt rise in domestic food prices, some 20% in one year. American taxpayers, moreover, subsidized the sales, which were secretly negotiated at below world market prices, and millions of farmers innocently sold their grain cheaply before the deals were publicized and grain prices soared. These prices are set in the nation's grain markets, which can fluctuate wildly on the basis of psychological factors, including all manner of rumors and speculations. The many middlemen between the farm producer and the food consumer grasp flimsy excuses to raise prices and increase their already disproportionate share of each consumer dollar spent on foodstuffs.

Whatever price increases may be attributed to the Soviet deal, they will not come from any grain shortage in the U.S. On the contrary, if much of the American farm surplus were not exported, it would have to be stockpiled, probably at Government expense. The wheat harvest, for example, is coming in at a record level, and the Agriculture Department estimates that less than half of it will be required for domestic consumption. Thus out of an expected crop of some 2.2 billion bushels, only 800 million is needed at home. But as Secretary Butz repeatedly demonstrates by dramatically peeling three slices off an 18-slice loaf of bread, the farmers' income from selling wheat accounts for only one-sixth of the supermarket price of bread. Rising costs of labor, transportation, distribution and packaging are more to blame for high food costs than are any sales abroad.

Yet the psychological impact of large Soviet grain purchases cannot be ignored. Even before this Soviet sale was foreseen, U.S. food prices had been rising at a rate that, if sustained throughout the year, would be a highly inflationary 22.8%. Most grain market experts expected this trend to be reversed when this year's harvests are completed, since record crops for both corn and wheat were forecast.

Then three things happened: 1) the Russians began making deals with private American grain exporters, signing contracts for the purchase of 228 million bu. of feed grains (mostly corn), 154 million bu. of wheat and 46 million bu. of barley; 2) one of the driest months of July in 30 years afflicted the corn crop in Iowa, which normally produces one-fifth of the U.S. total, thus casting doubt on the previous forecasts; 3) the Agriculture Department's shaky estimates of Soviet grain production were revised downward from 210 million to 185 million tons because of continued droughts in the Soviet Union plus better intelligence.

Price Jumps. Those events fed speculation in marketing centers that the grain prices would rise rather than fall, and such prophecies can be self-fulfilling. Rumors spread that the Soviet Union may well want to buy as much as 10 million more tons of grain beyond the 10 million already ordered. That would exceed the amount it bought in 1972. Remembering the 1972 price hikes, market operators anticipated similar results this fall. Partly because of speculators seeking quick profits, the price of grain for later delivery began climbing. In the past month the price of Kansas City wheat jumped from $2.20 to $4.05 per bu. Corn sold in Chicago rose 42-c- per bu., to $3.17. "The whole psychology for increased farm prices is already here," insists Charles Kershaw, a prominent Southern California cattle feeder who expects meat prices to rise later as feed grains for cattle and hogs become more expensive. Butz reacted to the complaints by asking all U.S. grain dealers to enter into no more contracts with the Soviet traders until the U.S. corn and wheat crops could be more precisely forecast. The greatest uncertainty had been over corn. The loss from Iowa's drought was estimated to be as much as 5% of the national harvest, yet corn was still expected to approach 6 billion bu., about a 25% rise over last year's crop. After looking at the figures, Butz was expected to signal a resumption of negotiations with the Russians this week.

Such an action would probably intensify rather than diminish the debate. The scrappy Butz was undoubtedly right in contending, as he did last week, that "there's nothing evil about exporting food" and the U.S. needs the income derived from such sales to pay for the large amount of oil it imports. He may have been correct, too, in claiming that neither Soviet purchases nor U.S. farmers can properly be blamed if food prices continue to rise in American supermarkets. What is even more certain, however, is that nothing is quite so maddening to most Americans as the rising cost of eating. If food prices soar, they are going to seek someone to blame.

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