Complex factors increasing commodity, food prices

Jacqui Fatka

Feedstuffs

7/23/2008

Commodity prices - and resulting food prices - are rising sharply, driven by a combination of factors that include high oil prices spurring biofuels growth, a weak dollar and world production and consumption trends, according to an analysis by Purdue University agricultural economists. In a Farm Foundation commissioned report released today, Purdue economists Phil Abbott, Chris Hurt and Wally Tyner highlighted key factors gleaned from examining 25 recent studies plus their own analysis. Their conclusion: a complex combination of factors are fueling agricultural commodity price increases and rising food costs.

When asked how long these current high prices would last, the economists indicated two factors might be most significant. "Based on this analysis, high commodity prices will persist as long as high oil prices remain and as long as the dollar stays weak," said Tyner. "Lower oil and a stronger dollar would bring pressure on commodity prices to fall."

Many studies point to the pace of global consumption being higher than global production as an important driver of commodity prices. In eight of the past nine years, consumption has grown faster than production. Unlike many who see China and India as major contributors to rising food commodity prices, the Purdue economists argue that is not the case. "It's countries who trade that set the price. China and India are agriculturally self-sufficient and largely do not trade agricultural commodities," said Tyner.

When it comes to the price of oil, however, Tyner said that's another story. "While China and India are not the root cause of food demand, the opposite is true for oil, as China especially has a huge and growing appetite for oil."

Read the full report online by clicking on "What's Driving Food Prices?"

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