In July 2008, crude oil prices were at record levels, as were most agricultural commodity prices. Low supplies generated fears of food shortages. The rhetoric of the food-versus-fuel debate rose along with food prices. Today, despite remarkable course changes, the key drivers of food prices and their complex interactions remain the same, according to a new Farm Foundation report, "What's Driving Food Prices? March 2009 Update."
This new report updates the analysis Purdue University economists Phil Abbott, Chris Hurt and Wally Tyner did nine months ago for the Farm Foundation report, "What's Driving Food Prices?" That report, released in July 2008, identified three major forces driving food prices:
- World agricultural commodity consumption exceeding production growth, leading to very low commodity inventories.
- The decline in value of the U.S. dollar.
- The new linkage between energy and agricultural markets.
In the second half of 2008, each of these driving forces reversed direction. A world financial crisis put the brakes on world income growth. Global crop production returned to more favorable levels for both the 2007-2008 and the 2008-2009 crops, as both production area and yields increased. After July 2008, the exchange rate of the U.S. dollar appreciated against major currencies. Energy prices collapsed, influenced by changes in income and exchange rates. Lower energy prices constrained the profitability of ethanol, contributing to weaker commodity prices.
“The transitions were truly remarkable-almost a 180-degree course change-yet the key drivers of food prices remain the same: supply and utilization of grains and oilseeds; the exchange rate of the dollar and related world macroeconomic factors; and the energy-agriculture linkage,” says Tyner, one of the three report authors.
“Our updated analysis verified the role of the key drivers, although they sometimes play out in somewhat different ways,” he adds.
For example, grain and oilseed prices have dropped sharply from record-setting peaks, but remain well above long-term norms. Commodity market prices have declined more rapidly than production costs, yielding tight margins for producers. In the future, agricultural commodity prices will depend greatly on exchange rates and crude oil prices, which in turn are linked to macroeconomic performance.
Macroeconomic forces such as global recession and financial crisis generate higher unpredictability-the impacts of these forces have been more quickly reflected in the value of the dollar, crude oil prices, and agricultural commodity prices, than have changes in supply and utilization.