Posted: July 6, 2011
Every time I go grocery shopping lately, I hear at least one person complain about high food prices, and everyone seems to want to know why.
USDA’s Economic Research Service recently released a new report that attempts to answer the question “Why Have Food Commodity Prices Risen Again?” The report provides a comparison between the 2008 price spike and the one we have been experiencing here lately, noting that while “many of the factors that contributed to price increases in 2002-08 and 2010-11 are the same, the timing, sequence, and relative importance of these factors varied.”
It is clear that food prices have risen since last summer, along with prices for everything else. According to the report, by January 2011, all of the major food price indices had set a new record high, surpassing their June 2008 records.
A couple of quick take-aways from the report, which is easy to read and includes several illustrative graphics:
- Prices for EVERYTHING are higher, not just food.
- Higher livestock products, particularly beef, are playing a bigger role this time.
- Recovery from global recession is increasing demand and prices for meat.
- Weather and declining S/U ratio are main immediate causes of current increase.
Regarding biofuels, the report notes that the huge increase in global production of both ethanol and biodiesel did play a role in higher crop prices between 2002-2008, “attributing most of the rise in food commodity prices to biofuel production, however, seems unrealistic. Crop prices dropped more than 30 percent during the last half of 2008 even though biofuel production continued to increase. Further, nonagricultural prices rose more than agricultural prices, and the price of corn (an ethanol feedstock) rose less than for rice and wheat (not biofuel feedstocks). Clearly, there were other factors at play.”
Weather appears to be the biggest contributing factor to higher prices this time around, according to the report. A series of adverse weather events were compressed into 10 months, beginning in June 2010. Weather around the world was either too dry, too wet, too hot, or too cold, sharply reducing expectations for 2010 global crop production and stock levels and resulting in higher prices. Similar production-reducing weather events occurred prior to the 2008 price peak, but they were spread over a 3-year period (2005-07).
The long-term contributing factors to higher food prices cited in the report include: global growth in population and per capita incomes, related increases in world per capita consumption of animal products, depreciation of the U.S. dollar, and rising energy prices. Maybe commodity market speculation as well, although the report concludes that while there is a “correlation” between market activity and higher prices, that does not necessarily indicate any “causal effects.”
The bottom line conclusion is that lots of factors contributed to food price spikes in 2008 and 2011, as well as five other similar spikes since 1970, and like the others before it, this too shall pass. Farmers and ranchers will make production decisions based on market signals and a new equilibrium will be reached. “With average weather over the next year or so, world agricultural production would be expected to increase and prices would retreat.”
In other words, what goes up must eventually come down. But when food prices come down again, will anyone ask why?