Edward Lotterman
Nothing is more important than good information in deciding how to use scarce resources productively. Interpreting that information is similarly important.
As I woke up my computer last week to write this column, the first screen to open up featured a headline: “Trump warns a ‘whole civilization will die tonight!’” Referencing Iran. The second showed a podcast with respected Wall Street economist Mohamed El-Erian asserting that, “Iran Crisis: Decline In Checks And Balances Causing ‘Violent’ Economic Shocks.”
Such news bodes ill for the Twin Cities, Minnesota, the United States and the world. As news items like this continue to stream across our screens, day in and day out, people are right to be concerned that their daily lives will suffer.
That does not mean, however, that the sky will fall immediately. People shouldn’t panic or abandon common sense or critical thinking. And economics tells us why: the inherent lag between cause and effect.
This was evident this past week if one considers a pundit’s warning that people should expect double digit increases in food prices in May alone. Why? Because continued closing of the Persian Gulf to global oil shipments would raise fuel prices, making it more expensive for farmers to grow food and truckers to move it. Higher fertilizer prices would hike food production costs. Less aluminum from the Gulf and higher energy costs in steelmaking elsewhere would boost food and beverage can prices. Grocery bills will cause mass distress in checkout lines.
Really? In just a few weeks?
The problem here is that the negative effects listed are valid. But the magnitude of these effects, and the time lags before they hit consumers are off. Common sense should tell people that — but one hears similar “Chicken Little” warnings all the time.
Consider the effects of higher metals prices on food packaging costs and thus on supermarket shelf prices. Yes, packaging can be a major expense for some food processors. The actual oat flour in breakfast cereals may cost substantially less than the corrugated cardboard case, printed paperboard box and plastic inner-bag that you’ll throw away. Variations in their prices affect manufacturer profits more than those of flour or sugar. But neither basic ingredient costs, nor the packaging costs are paramount in grocery shelf prices.
Think about humble tin cans. When President Donald Trump decreed high tariffs on steel and aluminum imports a year ago, one often heard how these would drive the price of cans, and hence groceries, higher. They will, but not as much as one might think.
Let’s do the math: The standard No. 303 can that holds about 15 ounces of sweet corn, peas or various beans weighs roughly 1.5 ounces, or 50 grams. The price of thin tinplate strip steel in Chinese, Indian or Taiwanese ports is about $900 a metric ton. Without any waste, as in stamping round lids from flat sheets, you’d get 20 50-gram cans per kilo or 20,000 cans per ton. Some metal is wasted so assume 18 per kilo of steel. That is a nickel per can. Thus a 20% increase in steel price due to tariffs or to raw material markets would add 1 cent to the cost of the can.
Right now, prices of tinplate to U.S. can manufacturers are at least twice as high as from Asian exporters. Some of that is due to actual transportation costs, some to tariffs and some to general overhead of importing, warehousing and distributing. So the steel cost is a dime per can here. Overall cost of cans is important to the fruit or vegetable plants, but a price increase for this raw material need not translate into checkout line shocks.
Aluminum costs much more than steel but the weight per can is lower. Worldwide prices relate to those on the London Metal Exchange. Current international export prices of strip for cans is around $3,000 a metric ton. Domestic U.S. users are paying around $4,500. A 12-oz. beverage can weighs about 15 grams, or a half ounce, versus 50 for steel cans. Allowing for some scrap in manufacturing, one gets about 60,000 cans per ton of aluminum or about 8 cents material cost per can.
(Understand an important difference between the two metals. Because of its higher value and that it doesn’t rust, a far higher fraction of aluminum gets recycled than steel. Experts estimate that 70% of all the aluminum ever produced in the history of the world is still in use today. So aluminum newly produced from ore, as that from the Persian Gulf, is a smaller fraction of the total marketable aluminum available than for steel. Hence a Persian Gulf closure on new aluminum has less effect overall.)
Can manufacturing, whether tinplate or aluminum, is brutally competitive. Manufacturers do wince when metals prices rise. Such increases will boost the price of canned groceries. But a metals price rise in international trade won’t cause double-digit rises in household costs of Bush beans or Budweiser beer in merely a few weeks.
Now consider prices of fuel, food or other consumer items. Relative price increases for diesel fuel have been higher than for gasoline. It went from roughly $3.50 a gallon in January to $5.50 nationally this past week. It is important in farming, where it costs a bit less since fuel taxes do not apply, and is of huge importance in the variable costs of trucking.
Average mileages for over-the road trucks would be five to seven miles per gallon for trucks with a net load of 40,000 pounds. That gives about a dollar in fuel cost per mile versus about 60 cents two months ago. Fresh items requiring refrigerated trailers necessarily cost somewhat more than dry goods. Canned or jarred groceries will quickly reach a 40,000-pound limit, but corn chips or saltines may fill the 4,000-cubic-foot volume limit of a semitrailer before the weight limit is reached.
Moving 20 tons of onions about 1,300 miles from Vidalia, Ga., to a grocery chain warehouse in Eden Prairie burns about 240 gallons of diesel costing about $1,300. That’s $460 more than before the latest war and hard-pressed owner operators feel it. Yet the increase from pricier diesel is 1.2 cents per pound on a product listed today at $1.79. Diesel for a truckload of national brand diced tomatoes hauled 2,000 miles from Fresno, Ca., to the same warehouse would be up $725 over the last 10 weeks. On a 28 ounce can now retailing at $3.49, the additional fuel cost would come to 3.6 cents.
Then consider fertilizer. This is a huge immediate problem for India and other low-income nations where rice or other grains consumed directly dominate diets. India itself produces millions of tons of urea fertilizer to grow crops directly eaten by its 1.45 billion people. But this depends largely on natural gas imported from the Persian Gulf.
India just asked for bids on supplying 2.5 million metric tons of this fertilizer needed for major crops tied to the monsoon season. This is an enormous buy. The U.S. only uses 2.9 million tons, although it also uses other nitrogen fertilizers.
If India and other rice consuming neighbors do not get such fertilizer soon, they face widespread hunger before the end of the year. We are in a very different place. Nitrogen fertilizers are important in producing vegetables here and in the parts of Mexico that supply us. But they are a small part of overall production costs. Higher plant food prices are not going to do much to affect prices of such specialty crops.
Nitrogen also is important for yields of wheat, which we do consume directly as flour in baked products. But wheat is not nearly as important to U.S. household nutrition as rice is in Asia. And the price of flour has been falling relative to the general price level. In 1975, our small-town grocer special-ordered 25-pound bags for my wife for $10. Last November, I bought one for my church at a restaurant-supply place for $7.50.
U.S. household diets are affected by fertilizer prices through the prices of chicken, eggs, pork and beef from animals that eat corn and soybean meal. We do buy vegetable oils made from crops that use fertilizer. But it takes months before costlier fertilizers make their way through supply chains to our cash register tapes.
This is much detail, so let’s step back a minute. Recent increases in fuel costs are only a small part of the overall costs of transporting food from producer to household. Taken alone they are not great but also not zero. The same is true for nitrogen and phosphate fertilizers. The lesson is that scare stories of food prices skyrocketing in the next few weeks due to war in the Persian Gulf are overblown. This does not, however, mean that households won’t be forced to spend more overall, especially over the longer run, as higher energy prices work their way through the entire economy. These increases will be real.
But the far greater impact of this unnecessary and destructive war will be on the overall economies of our own nation and around the world. Direct grocery and gasoline prices to households will in most cases be overtaken by slower growth of output. Employment well may fall and increases in the general price level may have greater effects than on the fraction going for food. Explaining all these dynamics must wait for another time.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.