July 26, 2008

What's Driving Food Prices?

What's Driving Food Prices?The Farm Foundation published a study titled "What's Driving Food Prices?" earlier this week. The study was conducted by Purdue University economists Wallace Tyner, Christopher Hurt and Philip Abbott.

As with other recent studies, the authors found that a variety of reasons were behind recent food price increases.

Why have commodity prices gone up so much? In the debate surrounding this question some have singled out one or two factors as the primary drivers of food price increases. The real and much more complex answer involves economic growth, international trade, currency markets, oil prices, government policies and bad weather.

In other words no one factor can be blamed for all food price increases. But as we know some have tried to blame biofuels production for all food price increases. The study points to oil prices for the rise in biofuels popularity.

Crude oil’s strongest and most direct impact on food prices has been through its effect on the demand for biofuels. Policies, including subsidies and mandates, in the United States and European Union led to the development of the biofuels industry and its growing demand for corn and vegetable oils. In the last four years, most of the growing global demand for corn has come from its increased use for ethanol production. The ethanol blender credit, tariff and Renewable Fuel Standard are factors causing increased corn price, but quantitatively most of the increase has been driven by higher oil prices.

Overall the study seems well balanced and very comprehensive.

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