19 January 2012

Hmm…


Overall, America's insatiable desire to chomp on overseas food has been growing. About 16.8 percent of the food that we eat is imported from other countries, according to the U.S. Department of Agriculture, up from 11.3 percent two decades ago.

Because of agricultural subsidies, food has not been as susceptible to outsourcing as other sectors of the economy.  What’s troubling about the recent increase in food imports is that shows, in part, that inflation is starting to hurt domestic production.

Keep in mind, in the first place, that subsidies effectively alleviate part of the high domestic costs of production.  These costs are the effects of taxes and regulatory compliance, among other things.  Subsidies offset these costs, which is why food manufacturers and packagers don’t outsource that often.

Also keep in mind that inflation reduces the margins for producers and sellers because there is an intense pressure to keep prices down. Since raising prices dramatically isn’t often an option, food manufacturers have to find a way to keep costs down.  One easy way to do this is to outsource production to a place where land, labor, and capital is cheaper.

Since food manufacturers have effectively done this, we can conclude that producers are trying to maintain their margins. And since food manufacturers are the direct or indirect recipient of subsidy, the only thing that can reasonably be assumed to be causing the increase in costs must be inflation.  As such, the increased outsourcing of food manufacturing simply does not bode well.

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