June 22, 2008

Is Ethanol Causing A Link Between Crude Oil And Food Prices?

I have seen it mentioned in several places over time that ethanol production is causing food prices to become linked to crude prices. An article in the news today put it this way.

The indices for food and non-food agriculturals too have risen by 40% and 25%, respectively, illustrating the close link between crude oil and food prices, the result of land being diverted to the production of ethanol.

A quick look back at the average annual price per bushel of corn, soybeans and wheat does suggest that food prices and crude prices are indeed linked together. Following the oil embargo of 1973 the prices of all three shot up quite a bit. Corn went from $1.57 in 1972 to $3.02 in 1974. Soybeans went from $4.37 in 1972 to $6.64 in 1974. Wheat went from $1.76 in 1972 to $4.09 in 1974. So over the span of two years corn and wheat almost doubled and soybeans went up by about 50%.

But there was little if any ethanol production to speak of in 1974. So with history as our guide, crude oil prices have a large impact on food prices, with or without ethanol production.

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