What’s [still] driving food and commodity prices?

WEST LAFAYETTE, Ind. — A trio of economic factors that sent commodity prices soaring in mid-2008 has since reversed course and is pushing prices lower.

Last year, three Purdue University agricultural economists identified three major drivers of food prices: trends in global production and consumption, the value of the dollar and biofuels.

Still true

That hasn’t changed. Last week, economists Wally Tyner, Philip Abbott and Chris Hurt revisited their July 2008 report What’s Driving Food Prices? .

“One of the key questions we asked in doing this new study was, ‘Are these same three that drove prices up the ladder now driving prices down the ladder?’ The answer is yes,” Tyner said.

Tyner and Hurt presented the update in a Farm Foundation Forum at the National Press Club in Washington March 11.

(Read the July 2008 “What’s Driving Food Prices?” report and today’s update.)

Simple supply and demand

This time around, they found a stronger American dollar, falling ethanol demand and rising grain stocks combined to send corn, soybean, wheat and rice prices cascading in late 2008.

Behind those dramatic changes is the global financial crisis, the economists said.

“The dollar had lost about 67 percent of its value through July 2008, and since July it has gained 22 percent of that value back,” Tyner said.

“Since July, the expectations on supply and demand are that our stocks are going to be better than we thought, since 2008 was a good production year and world demand has dropped. So supplies are not nearly as short now in terms of stocks-to-use ratios as they were before.”

But the demand for biofuels is not what the economists thought it was going to be.

“The price of oil comes down, the price of gas comes down and demand for ethanol goes down. That means there’s not as much corn needed to make ethanol, and, therefore, not near as much pressure on the price.”

Given time, consumers are likely to see lower prices for some food items, Tyner said. “

No one’s buying

Demand is down for everything,” he said. “In particular, demand is down more for meat products, which means less demand for the corn and soybean meal to produce meat. It filters through the system.”

It takes a long time for some animal livestock products before those lower commodity prices get filtered into the meat, dairy and eggs, he added.

Poultry products are the quickest. For beef it’s the longest time period — up to several years — and for pork it’s somewhere in between.

“For some meat products, we may be seeing prices now that reflect more what corn and soybean prices were last year than what they are this year.”

“Some products like eggs, milk and dairy products will have lower prices this year,” Hurt said. “Others like meats may be close to unchanged, and fruits and vegetables will likely still be somewhat higher.”

Grim grain markets

The news for crop farmers is not as rosy, however. Production costs have not fallen as quickly as commodity prices. As a result, input prices remain relatively high, Tyner said.

“Had commodity prices stayed high, farmers could have supported those input prices,” he said. “It’s going to be a tight margin year for farmers. They came off of two really good years, but this year is going to be much different.”

Added Hurt: “The future for agriculture is also closely tied to the depth and duration of the current recession, as well as to the magnitude of the recovery in coming years. Other important factors will be how governments and consumers respond to the downturn, and how biofuels policy evolves in coming years.”

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