Tuesday, March 10, 2009

Why is Organic & Locally Grown Food more expensive?

I was recently asked by Adam Salazar - who is pitching this story to Daily Iowan TV - this question, so I thought that I would expand on my comments from the interview. There are really two parts to this question; the first part is why are food prices rising in general, and the second is why is organic or locally grown food prices higher than mass produced food prices. So let's take them in order.

I can think of three reasons why food prices have been rising. One is that incomes of people in developing nations have been increasing, and many people in developing nations have the opportunity to choose the type of food they consume. Many are switching from rice (or other subsistence food such as millet) to more calorie rich foods like meat. Second, is that given the bio-fuels craze, the prices of agricultural products like corn have been increasing, and since corn or corn by-products are inputs in a plethora of food products (from sweeteners to feedstock) the cost to food manufacturers are increasing, and some of those costs are passed onto consumers. Finally, with energy prices being higher than in the past, this is also increasing food manufacturers costs and these costs are partially also being passed on to consumers.

All of those reasons are reasons that organic and locally grown foods are higher priced, that are different from mass produced food. One of the biggest reasons that organic/locally grown foods are higher priced is something that economists call economies of scale. Economies of scale is the idea that when a firm produces more output (i.e. scales up its production) that average (or per unit) costs fall. So applied to organic/locally grown food - this means that smaller amounts of output produced will lead to higher costs than when producing larger amount of output. A second reason is that producing organic foods may be more costly since by not using pesticides and other agricultural chemicals on the plants growing the food will likely lead to lower yields per acre. Given that fixed costs are constant, lower yields means that production costs are likely to be higher for organic foods then for mass produced food. Finally, organic/locally grown farmers have to take into account how food retailers can influence prices. Since large grocer's such as HyVee or Walmart can benefit by buying in large quantities of food, in order for organic/locally grown farmers to get access to scarce grocery shelf space, organic or locally produced food products will likely have to pay higher prices for access to the scarce shelf space of food retailers. Some of these higher prices of organic/locally grown food firms are passed on to food consumers in the form of higher prices.

In each of these three cases, organic/locally grown food farmers have to take into account these higher costs when trying to set their prices - leading to higher overall prices.

1 comment:

ganiyat said...

Hello, I am a student doing some research. But I'm a little skeptical using this blog in my research. I'm researching how the distance that food travels affect its price. It would be great if you can site your sources.