(Updating to include Paragraph 6)
Tanner Ehmke, AgWeb
Biofuels are responsible for 10% of the inflation in food values, and the high volatility in the agricultural commodity markets is likely to continue through 2009, USDA Chief Economist Joseph Glauber says.
Glauber spoke Thursday, Oct. 3 at the Federal Reserve Bank of Chicago's conference "Agricultural Markets and Food Price Inflation," highlighting the correlation of high commodity prices and rising food prices.
"The impact (of bio fuels) on the raw commodities is pretty large - corn on the order of 30%, soybeans on the order of 40%,” Glauber said. "However, the impact on food prices varies quite a lot.”
Glauber noted that the price of products such as vegetable oil and high fructose corn syrup are much higher due to higher corn and soybean prices.
"But because the value of those products is fairly low relative to the overall cost of the food at the retail level, the impacts are fairly small,” he says. On the food Consumer Price Index (CPI), biofuel production is responsible for approximately a 10% increase in food inflation over the past year, he said.
All food prices rose 4.0% in 2007, between 5.0% and 6.0% in 2008, and are forecast to rise between another 4.0% to 5.0% in 2009, according to Glauber's presentation. With biofuels claiming 10% of the rise in food prices in the past year, the remaining 90% went to other factors such as rising global caloric needs and shortfalls in crop production.
The effects of bio fuels is more latent, though, in the livestock and dairy markets, he said.
"You get higher feed costs, margins shrink, the herd size tends to reduce, but that takes time,” he said. "But poultry reacts fairly quickly, hogs somewhat slower, cattle somewhat slower still.”
But at the same time, meat prices have also been supported by rising export demand, he said.
Market Volatility to Continue
The high volatility that has made hedging difficult for corn producers and end users likely will continue into 2009, according to Glauber, with the market demanding more corn acres to meet growing bio fuel needs.
"We planted about 87 million acres this year,” he said. "I think most people think that somewhere along 3-4 million additional acres will have to come in next year to meet this demand.”
USDA has corn seedings for 2008/09 tallied at 87.0 million acres, down sharply from the 93.6 million planted last year. Ending stocks, meanwhile, are figured at 1.018 billion bushels, down from 1.133 billion in 2007/08.
"Relative price effects at the time of planting – and then certainly ill effects on the weather issues and everything else – which points to, at least because of the stock levels, for high volatility to continue.”
In the long run, he added, agricultural commodity prices will be determined by the price of energy and if increases in productivity can be sustained at current rates.