Creeping Food Prices

More evidence of the biofuel craze affecting the food supply:

TOKYO, May 14 (Reuters) - Japanese food and service prices are creeping up, a possible sign that companies are finally starting to pass on higher raw material costs to customers despite overall tame consumer inflation, analysts say.

Consumers accustomed to nearly a decade of deflation were stunned when food maker Q.P. Corp. (2809.T: Quote, Profile, Research raised mayonnaise prices for the first time in 17 years.

Some supermarkets are selling orange juice at higher prices than before, while several restaurants are charging more for their rice bowls topped with meat and vegetables.

Rising raw material costs are partly behind such increases, as was evident from the Bank of Japan's wholesale price data released on Monday.

What's missing is why this is happening. We know why mayonnaise and orange juice is more expensive--the demand of bioethanol is pushing prices up. I'm not sure what is meant by "finally starting to pass on costs." What are companies supposed to do when the price of corn virtually doubles in six months? That kind of jump is hard to absorb. Either companies pass the cost to the consumer or they take a hit as is the case with Hershey

The high price of corn is punishing chocolate maker Hershey, which on Thursday cut its earnings expectations as the result of rising demand for ethanol.

Neither corn nor its distillate ethanol are directly tied to the confectioner's products, but soaring animal feed costs are pushing up dairy prices. Hershey cited an April 20 projection from the U.S. Agriculture Department that dairy prices would rise this year as a reason for its reduced outlook. The company, which earned $559.1 million last year, thinks that will grow by 4% to 6% this year, down from its April forecast of 7% to 9%.

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Last summer, a bushel of corn went for as little as $2.17, but it climbed to $4.37 early this year and ended Thursday at $3.54 on the Chicago Board of Trade. Farmers are diverting corn sales to ethanol producers, who are being encouraged and subsidized by the federal government to make the fuel as an environmentally friendly replacement for at least part of America's gasoline needs.

Back to Japan, this evening's Close-up gendai on NHK featured how the bioethanol craze may help rejuvenate the countryside. According to the broadcast, there are an estimated one million hectares of fallow or empty rice paddies that could be put into production for making ethanol and livestock feed. This land could produce six million tons of rice which could be used to produce 1.8 million kiloliters of ethanol.

Although Japan cannot yet compete on price with ethanol from Brazil or imported grain for making ethanol, the high price of corn has forced farmers to switch from feeding their pigs and chickens corn to feeding them rice. Not only is it cheaper, but the rice can be locally and reliably produced.

The broadcast was upbeat in its assessment. It seems that thinking local could pay off for Japan. The demand for bioethanol may help put (force?) more rice fields back into production which would mean more employment in the countryside. This could form the foundation for a more sustainable lifestyle based on local jobs and local production and consumption. That said, the underlying assumption of the broadcast was that ethanol from rice will allow us to keep driving or eating as usual. Touting the benefits of a million hectares of land back into production is one thing, but are we to assume that this one million hectares is fixed or will it be increased to meet an ever-increasing demand for ethanol?