The Purdue economists also look at the reasons which have brought these drivers to the forefront. Among those are:
- The ethanol mandate and other biofuels policies that have resulted in a corn demand that has not responded to market pricing. The nation’s fuel supply is supposed to have ethanol, and that demand must be met regardless of the cost of making it. But because of the fact that corn-based ethanol has reached its maximum content level in motor fuel, there should be very little additional force that it puts on the market.
- Chinese income growth bolstered its demand for food but also China has been building its own grain stocks which have fostered more purchases than necessary. Depending on the continuation of that stocks policy, China’s rate of food purchase may slow when the country decides its stocks are at sufficient levels.
- Depending on demand for certain crops, land is reallocated for their production. If China and ethanol refiners want more corn, then land will be allocated for corn instead of other crops which may provide a lesser profit potential. The Purdue economists say in 2005 it took 16 mil. acres to supply China and ethanol, but in 2010 it took 46.5 mil. acres to do the same.
- Due to the inelastic market, and the trouble it has responding to the increased demand, other factors have aggravated the situation including trade policy, greater demand for livestock feeds, and tight food stocks, such as livestock producers having to pay more for feed. The latter has resulted in production cutbacks.
The Purdue economists say the current year may not allow a return to periods of robust stocks because of the weather, and global stocks will remain tight with corresponding higher prices.
However, they cannot identify whether the market is shifting upward or whether we are in a boom or bust cycle, which cannot be determined until other economic factors are clearer.
They do speculate that removal of the ethanol subsidy program would have more impact on the refiner and the blender than on the farmer growing corn, and lower oil prices would have a significant impact on the ethanol economy. They also suggest that shifting US farm policy from one that reduces supply to stimulating supply would result in benefits that would not happen if demand were not subsidized by either taxpayer funds or policy mandates.
Significant drivers in the current US food economy have been China and biofuels, but because the market has been unable to easily respond to those major consumers, other forces have pushed and pulled on commodity prices more than would have been expected, such as weather and the exchange rate. Food and feed supply and price pressures might be relieved with changes in agricultural policy that remove subsides for using commodities and replacing them with policies that promote more production.
Source: the FarmGate blog