farmgate: Food Prices: What, Why, and Where
If you have been to the grocery store lately, you will have noticed: bread prices are still high, cereal is being sold at former prices but in smaller boxes, cooking oil prices have not declined; all the while grain prices have come well off their summer highs when food manufacturers blamed high commodity prices for skyrocketing food prices. What is the answer to this? Or is there an answer?
Ron Trostle says Fluctuating Food Commodity Prices are A complex Issue With No Easy Answers. Trostle is a USDA economist and addressed the conundrum between divergent food and commodity prices in the November issue of Amber Waves, a USDA electronic magazine.
He notes that commodity prices have risen sharply over the past two years; developing countries have demanded more food and world stocks have declined; and the whole issue is pushed and shoved by energy prices, exchange rates, weather problems, and trade issues. When all of those come into play, answers are not easy.
Trostle says the International Monetary Fund calculates a 75% increase in market prices for food commodities from early 2006 to July 2008. While food commodity prices have risen, the index for all other commodities, such as metals and crude oil, has “significantly outpaced it.” The food commodity index has risen 130% since January 2002, but other commodities have risen 330% and oil has risen 590%.
USDA economists have suggested that food commodity prices have risen because of long term supply and demand trends, higher energy prices, increased biofuel production, lower values of the dollar, adverse weather, and how other nations respond to inflation with their policies.
1) Within the market environment, Trostle says stockpiles have declined here and abroad, and increased demand causes up-trends in the market. But he says the demand has been building slowly and with two decades of stable food prices there was neither reason to keep stockpiles high nor any reason to fund crop research. Finally, growth in per capita income resulted in increased demand for quantity and quality of food.
2) Also slowly building was the demand for biofuels, until 2003 in the US and 2005 in the EU when production grew rapidly; the former helped by the federal renewable fuels mandates. But global demand for biofuels has created more demand for feedstocks such as sugarcane, soybeans and corn, all of which have multiple uses.
3) Other government policies, here and abroad also contributed, including those that impact currency exchange rates. Although importers with strong currency had more buying power, exporters with weaker currency saw their commodities in high demand. What was good for the grain seller was not good for the oil and fertilizer user. Additionally, traders, who followed the trends, kept bidding up prices and included commodities in their portfolio to push values much higher than fundamentals may have warranted, exacerbating price volatility.
4) Nations which had enjoyed low food prices for their consumers saw commodity prices rise and fearing exports would create shortages, applied export taxes to keep commodities within their borders. But nations with growing wealth, such as China and the OPEC nations, imported food without regard to price and that only served to keep prices high. The downside was the inability of poorer countries to both obtain food and to buy inputs to raise more food. Those countries subsequently were no longer being served by food aid donations because of the high cost of the service.
So what is ahead for food prices and commodity prices if they are so intertwined with complexity? Trostle says weather issues will have the most immediate impact on supply and when 2008 production potential was determined, and then commodity prices weakened. But the demand factors remain, including global economic growth and subsequent food demand, biofuel demand, as well as weather and credit challenges in other nations which are unable to produce sufficient crops. Higher food prices will encourage greater production, research for higher yields, and higher land values.
Summary:
After commodity prices climbed earlier this year, food prices followed, and although food prices have continued at high levels, commodity prices have fallen. The economic relationship is quite complex, and includes exchange rates, trade policy, biofuel demand, and global economic growth. Weather will always impact the supply, but the other factors strengthen or weaken the demand. If food prices continue at high levels, they will encourage higher commodity prices and more production.
Posted by Stu Ellis on November 10, 2008 12:17 AM to farmgate