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Rural Life

November 15, 2008
By: Sara Schafer, Farm Journal Media Business and Crops Editor
 
 

High grocery bills have consumers upset around the globe, and there has been no shortage of finger-pointing as to who is to blame. International oil companies, biofuel companies, commodity hedge-fund speculators, policymakers and even farmers have been singled out for driving up the cost to eat. But finding one culprit for the rapid increase in food prices is not that simple, says Neilson Conklin, president of Farm Foundation, which seeks to provide objective information to foster sound farm policy.

"Today's food price levels are the result of complex interactions among multiple factors,” Conklin explains. The major cause is growing demand for food worldwide, coupled with the slowing growth in agricultural productivity, which is fueled in part by greatly increased energy prices.

That sums up the conclusions of three Purdue University economists who Farm Foundation asked to analyze more than two dozen studies of various forces driving food prices. Wallace Tyner, Christopher Hurt and Philip Abbott's study, "What's Driving Food Prices?” can be found at www.farmfoundation.org. Here are highlights of what they found.

Food consumption is increasing faster than production. As incomes rise, people in developing nations have a greater appetite for animal protein. Increasing hog, cattle (both beef and dairy) and poultry production to satisfy appetites requires more grain. But grain production has not kept pace.  According to USDA, world grain stocks now stand at 16%, their lowest point since the early to mid-1970s.

One reason productivity has not kept pace with demand is lower investment in research. When surpluses were piling up, Congress and state legislatures made cuts in ag research, which are now coming back to haunt us. Previous studies and media reports point to China and India as examples of consumption outpacing production. The Purdue economists note that neither of these countries is a significant player in the world grain trade. China imports soybeans and vegetable oils and India exports rice, but their trade policies stress self-sufficiency. For that reason, they present no major influence on worldwide commodity prices.

The almighty falling dollar.
The Purdue economists believe the link between the U.S. dollar exchange rate and commodity prices is a more influential factor in food prices than past studies have indicated.

The reason, Tyner explains, is that ag commodities are priced in U.S. dollars worldwide but are purchased in local currencies. As the value of the dollar depreciates, U.S. grain and soybeans become a greater bargain. The result? Stronger demand abroad for U.S. products. From 2002 to 2007, the dollar depreciated 22%, and ag exports increased 54% from $53 billion in 2002 to $82 billion in 2007.

Higher oil prices. Rising crude oil prices are increasing production costs, but the initial impact has been on the demand side, not supply. "Higher crude prices mean higher gasoline prices, which mean greater demand for ethanol,” Tyner explains. "Stronger demand for ethanol, in turn, translates into higher demand for corn and, therefore, higher corn prices. "In 2008 and 2009, we'll see the cost side kick in as increased crude oil prices result in higher costs for diesel, propane, fertilizers, chemicals and other inputs,” Tyner says. "As production costs reach unprofitable levels, acreage cutbacks could result.”

Increased biofuel demand. The global increase in demand for corn in the past four years is primarily from the growth of ethanol production.
The economists maintain that while the U.S. biofuels program has significantly increased the demand for corn and vegetable oils, it has had less impact on corn prices than media reports would have one believe.

They point out that most of the $4-per-bushel rise in corn prices (about $3) is due to higher crude oil prices. About $1 per bushel of the increased cost is due to the ethanol subsidy. On a sobering note, they say higher grain prices have not yet been fully passed on to consumers. Egg prices have increased, but expect higher costs for beef, pork and poultry as production and marketing in these sectors adjust to higher feed costs.


 

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FEATURED IN: Farm Journal - Mid-November 2008

 
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