Farmers have long been willing to produce for the market, and farm programs over the past 20+ years have moved agriculture from a managed supply to a market oriented pricing system. But when you produce for the market, you don’t always know who is going to come to buy. While the American consumers have been the primary force, they are being supplanted by Chinese consumers. And while American farmers have worked long hours to build markets for their products, the ethanol success story has also become a driving force beyond consumers and livestock. So the adage “Be careful what you ask for, you may get it” can certainly be applied to US agriculture, and with some surprising results.
At the request of the Farm Foundation, Purdue economists Wally Tyner, Phil Abbot, and Chris Hurt took up the challenge of defining what is driving US food prices in 2011. Their analysis of identifying what is pushing food prices brought several dynamics to the forefront.
- The market has seen two major players have a larger impact than any other, and both are familiar to farmers. China’s demand for corn, as well as soybeans, has shifted from rumor to fact, due to its growing and hungry population which has the money to spend on better food. The other is ethanol, which shifted from a background consumer of corn to front and center when Congress approved the biofuels mandate.
- The economists, in economist-speak, say another dynamic is the fact that markets are more inelastic than they used to be, and have become more volatile when such consumers as China and biofuel come to the market and make headlines. And the inelasticity is worsened because of all of the forces are having a bigger impact on the market than they used to have.
- A third dynamic is increasing weather events that have adversely affected yield and the impact they have had on stocks, which have been slowly declining. Subsequently, the low stocks to use ratios that are becoming prominent in market reports are having a greater impact on market prices.
- China shows up in another way, which is how it manages its supplies of grains and its difficulty addressing internal issues of self sufficiency. While China imports most of its soybean needs, its other food needs are largely disconnected from world markets.
- The fifth factor is the collection of other macroeconomic factors that push and pull on the market, not the least is the exchange rate and the dollar’s value compared to other world currencies which fluctuates daily. With a weak dollar, and a volatile relationship with other currencies, from one day to the next it will either throw water or gas on a fire that is the US commodity market.