Purdue study investigates food price increases

By Jerry Kram | July 08, 2008
Web exclusive posted July 28, 2008 at 9:48 a.m. CST

A new study released by the Farm Foundation seeks to understand the complex and multiple factors influencing food prices. Written by Purdue University economists Wallace Tyner, Christopher Hurt and Philip Abbott, the study "What's Driving Food Prices?" identifies three forces behind food price increases: global changes in production and consumption of key commodities, the depreciation of the U.S. dollar, and growth in the production of biofuels.

The authors reviewed current reports and studies as they did their own analysis of the situation. "We made no attempt to calculate what percentage of price changes are attributable to the many disparate causes and, in fact, think it is impossible to do so," said Tyner, the lead author of the report. "But examining the interplay of the forces driving food prices gives a clearer picture of what has been happening." Tyner, who is an energy and policy economist, has most recently been specializing in biofuels policies. Hurt analyzes commodity markets, while Abbott analyzes international trade and macro factors. Key findings of the report include:

• Rapid economic growth in developing countries has lead to broad-based growing food demand and dietary transition from cereals toward more animal protein. As a result, global consumption of agricultural commodities has been growing rapidly.

• Demand for agricultural commodities has increased, while growth in agricultural productivity has slowed. Over the past four to eight years, depending on the commodity, this combination has resulted in a change from a surplus to a shortage era, setting the stage for commodity price increases.

• There is no doubt that the amount of hedge fund and other new monies in the commodity markets has mushroomed. Price volatility has increased, partly due to increased trading volumes. Based on existing research, it's impossible to say if price levels have been influenced by speculative activities.

• The link between the U.S. dollar exchange rate and commodity prices is strong and more important than many other studies imply. The decline of the dollar is linked not only to higher demand for U.S. agricultural commodity exports, but also to higher oil prices.

• Crude oil's strongest and most direct impact on food prices has been through its effect on the demand for biofuels. In the last four years, most of the growing global demand for corn has come from its increased use for ethanol production. Ethanol blender credits, tariffs and the renewable fuels standard are factors causing increased corn prices, but quantitatively, most of that price increase is driven by high oil prices.

"We commissioned this report to provide a comprehensive, objective assessment of the forces driving food prices," Farm Foundation President Neilson Conklin said. "It is the intent of Farm Foundation that the information will help all stakeholders meet the challenge to address one of the most critical public policy issues facing the world today."