The changes in the value of the dollar, agricultural commodity prices and crude oil prices followed similar relationships leading up to the June/July 2008 peak and afterwards. A weak dollar meant higher dollar prices, stronger exports and weaker imports. Since July 2008, the dollar has appreciated against the Euro and many other currencies-especially those of developing countries-leading to weaker exports and more imports. Appreciation of the dollar also contributed to rapid declines in the dollar prices of agricultural commodities.
Since 2006, energy and agricultural markets have become closely linked as biofuels production surged. Ethanol and biodiesel were linked as energy substitutes for gasoline and diesel, and usage of crops for these biofuels became large enough to influence world prices. In the last half of 2008, crude oil prices fell rapidly, but gasoline prices fell faster and further. Low gasoline and crude oil prices reduced the expected use of corn for ethanol which, in turn, put pressure on ethanol prices and corn prices.
By the end of 2008, the ethanol industry's economic fortunes had deteriorated such that up to two billion gallons of capacity was idled. There have been changes in the way markets are now functioning but the basic relationship between crude oil and corn remains strong.
Farm Foundation's July 2008 report and this update confirm the linkages of the three key drivers of food prices. “Whether the future takes prices up or down depends on many unknowns-not the least of which are the depth and recovery characteristics of the current global financial crisis and recession,” Tyner says.
Other unknowns include the potential for inflation and its possible influence on commodity prices, the direction of the U.S. dollar exchange rate, the price of crude oil and agricultural commodities.
Understanding the function of the driving forces of food prices is critical in helping public and private leaders make informed decisions about business strategies and public policies, says Farm Foundation president Neil Conklin. “Farm Foundation commissioned the first report to provide a comprehensive, objective assessment of the forces driving food prices. Building on that analysis, this update further broadens that information base.”
As part of the first report, Abbott, Hurt and Tyner reviewed recent studies on the world food crisis. The March 2009 Update report includes an annotated bibliography of studies released since June 2008. Both reports are available at: www.farmfoundation.org.
Source: Farm Foundation