WASHINGTON – A diverse and complex set of factors – including biofuels production, high oil prices, a weak dollar and food consumption rates – are behind the sharply rising cost of food, according to an analysis by Purdue University agricultural economists released Wednesday.
The economists predict food prices will remain high as long as oil prices are also high and the dollar is weak.
“Lower oil and a strong dollar would bring pressure on commodity prices to fall,” said economist Wally Tyner, the report’s lead author.
He also said the full impact of higher corn and soybean prices haven’t shown up in grocery prices yet.
The cost of food has increased 7.5 percent since last year, according to the most recent government figures available. The U.S. Department of Agriculture says the highest anticipated increases this year are in eggs, dairy and poultry.
The government’s explanations for the increases are similar to those identified by Purdue researchers: stronger global demand, increased exports caused by both the stronger demand and weaker dollar, weather-related production problems and the increased use of corn and other food commodities for bioenergy.
The Purdue researchers said the factors are too interrelated to be able to say how much of the price increase is caused by each factor.
But they did breakdown the impact on corn, which has tripled in price since 2004. The analysts estimated that about $1 of the $4 increase in a bushel of corn is due to the U.S. subsidies of the ethanol industry. The rest was caused by the increasing price of oil.
“There’s a link today between crude oil and corn that never existed in the past,” Tyner said, calling that a “revolution” in global agriculture.
“Even if all the subsidies go away tomorrow, corn prices will still be high unless we choose to ban the use of corn for ethanol,” Tyner said.
The biggest pull comes from increased demand for biofuels as gasoline becomes more expensive. That increases the demand for corn, as well as for petroleum-based items including fertilizer and diesel that are used to grow commodities.
And because oil and agricultural commodities are priced in dollars, the declining value of the dollar has made them cheaper for other nations, increasing the demand.
“The link between the U.S. dollar exchange rate and commodity prices is stronger and more important than many other studies imply,” said Purdue economist Phil Abbott. “Whatever impacts the dollar will influence food prices.”
In addition, the world has been consuming more food than it produced in eight of the last nine years.
The Food and Agricultural Organization, a United Nation’s group that addresses hunger, estimates that nearly 40 countries are facing food shortages that require international intervention.
But don’t blame such fast-growing countries as China and India, the Purdue analysts say.
“It’s countries who trade that set the price,” Tyner said. “China and India are agriculturally self-sufficient and largely do not trade agricultural commodities.”
But China and India do have a growing appetite for oil, which indirectly increases the price of food.
Because the increased world demand has diminished stocks, weather-related crop disruptions are more significant.
Last year’s drought and this year’s late planting and flooding will affect commodity prices, according to the report.
In the short term, Tyner, said, the government needs to focus on assistance programs such as subsidized school lunches, which help vulnerable populations while making sure producers are benefiting from the increased prices so they’ll keep up production.
Brad Lubben, an agriculture economist at the University of Nebraska-Lincoln, said that before policymakers start debating whether energy policy needs to be changed to lessen the impact on food prices, they should remember that just a few years ago, people were concerned that food was too cheap, leading to over-consumption and obesity.
“Two years ago, agriculture policy was the villain because food was too cheap. Today, agriculture policies are villains because food is too expensive,” Lubben said. “It’s fair enough to say that every policy we’ve had has distorted what would otherwise be supply and demand balance in the market place. But it’s also worthwhile to note this interesting shift over the last couple of years from a food surplus mentality to a food shortage mentality.”