Key Factors in Commodity, Food Price Increase Identified

Key Factors in Commodity, Food Price Increase Identified

Many of these factors were at work in 2008. Still, new factors have driven prices to new levels.

A new report from Farm Foundation, NFP finds that while some of the same factors that drove commodity and food price increases in 2008 are at work today, new and very different factors have also emerged.

The report, "What's Driving Food Prices in 2011?", cites the role of two persistent demand shocks – corn for biofuels production and soybeans for China – in the mix of factors pushing commodity price increases in recent months. Other factors include weather-related production shortfalls, changes in cropping patterns and a weak and volatile U.S. dollar.

Farm Foundation, NFP commissioned the report from three Purdue University economists: Philip Abbott, who works in international trade and macro factors; Christopher Hurt, who works in analysis of commodity markets; and Wallace Tyner, an energy and policy economist most recently specializing in biofuels policies. The report builds on similar reports written by the authors for Farm Foundation in 2008 and 2009.

The authors identified five key factors in shaping today's price story:

1. Persistent demand shocks-specifically demands of the biofuels industry, particularly for corn, and China's decision to import huge quantities of soybeans due to income growth and stocks-building.

2. Market inelasticity--a reduction in the responsiveness of prices to demand and supply forces-is one of the key mechanisms in today's commodity markets.

3. Weather and grain stocks: Weather is more important in 2011 than in 2008. Wheat and barley suffered weather-related production setbacks, but large stocks tempered price increases. Corn stocks were drawn down when U.S. yields dropped in 2010. Soybean stocks have remained tight as Chinese demand has surged. With adequate stocks, rice prices have not increased.

4. Chinese Policies: China has been a major holder of agricultural commodities but the stocks-to-use ratio of each commodity has varied considerably over the past decade. The policy to accumulate substantial soybeans stocks through imports is one example of the impact on world markets.

5. Macroeconomics: A weaker U.S. dollar contributed to a commodity boom between 2002 and 2008. Today, changes are not as dramatic, but the dollar exchange rate remains weak and volatile.

The full report is available on the Farm Foundation, NFP Web site (www.farmfoundation.org), where the prior reports are also posted. Farm Foundation, NFP works as a catalyst for sound public policy by providing objective information to foster a deeper understanding of issues shaping the future for agriculture, food systems and rural regions. The Foundation does not lobby or advocate.

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