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Surely Taking Corn out of the Market will Raise the Price
30 May, 2008 04:16 pm
I've been in conversation with David Benson, about the role of biofuels in the current round of food price rises across the world.
For what it's worth, I think there are a number of pretty likely reasons for the rise in food prices.
One of the most important is that the price of crude oil has risen over the past year from $65.5/bbl to $130/bbl . This hits the price of food because the price of harvesting it, moving it, processing it, distributing it and taking it home is influenced by the price of oil. This influence is greater in the developed world, where people eat more energy intensive processed food.
Another are distortions caused by trade and by protectionism. Most countries want to operate their agriculture at a surplus, this keeps prices to consumers down (which helps keep the peace) and farmers happy, through subsidies. There are often difficulties where this process ends, when local farmers can not compete with imports and when these get more expensive .
Thirdly, there are distortions in the world market. Protectionism isn't perfect and countries with too much excess production may sell their surpluses in foreign markets at or below their own cost of production and transportation. That's dumping, which spoils otherwise well balanced markets. (Fair trade is the best solution but there's no time for that now)
Fourthly, there are futures contracts. These allow farmers to fix the amount of money they will get when their crops are harvested. But also they allow speculators* to enter the market and trade the contracts amongst themselves.
*You may wish to call them investors.
Finally there is the level of production of crops and the demand for crops.
I'd put more weight on this aspect, than David does. I do this on the basis that taking 25% of the
The USDA says in its baseline prediction for 2008 to 2015 for corn.
Market adjustments to the increased demand for corn to produce ethanol extend well beyond the corn sector. Movements in relative prices trigger supply and demand adjustments for other crops. Higher feed costs affect the livestock sector, slowing increases in or reducing production of all meats over the next several years.If you reduced the volume of a big commodity like corn in a big producer it simply has to contribute to bringing supply and demand closer to balance. Once we get to balance then small distortions in supply will have big impacts on prices. This may be why the drought in
Originally published on: The Big Biofuels Blog
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Don't neglect the price of fertilizer. While a fast Google search doesn't turn up the data, oil forms a non-trivial part of the cost of fertilizer, which has nearly tripled in cost over the recent past according to news reports I've seen. That not only increases the cost of food produced, but reduces the amount of food produced in many third world countries due to skimping on fertilizer due to its cost to marginal and near-subsistence farmers.
A couple of years ago when the price of corn was $2 an bushel, it accounted for 2.5 cents of the cost of a box of corn flakes. Now at the price of $5 a bushel it is 6 cents a box. So is food (corn) all that more expensive or is it the cost of the processing, transporting and storage of the food products that are rising substantially . Because the price of corn flakes have gone up a lot more than the 4.5 cent difference of the raw material.
Energy prices are the real culprit here. Food inflation is only a result not a cause.
Yes fertilizer is a big input into the carbon load of many crops with environmental costs of its own. Policy makers in the US don't seem to mind that they are becoming increasingly dependent on overseas fertilizer producers to maintain the yields of their crops. This might be because these are produced in countries like Canada and areas like the Caribbean.
Although energy is a much bigger component than the price of ingredients in processed foods , this has protected consumers in the developed world against the rise in the price of the ingredient. If on the other hand, the developed world bought grain in the market, took it home and converted it directly into meals, then the increase in food prices would be being discussed quite differently. It is not just the price of oil driving the price of food, supply and demand in the commodities themselves is also a driver: and it gets more important the less food is processed before purchase.
The real reason is that in addition to higher transportation costs for food, the input costs for growing food has risen sharply as a result of the increase in the price of a barrel of oil. Almost everything we use today is Petro-based. In the case of farmers, besides running their farm equipment, fertilizers and pesticides are made out of petroleum (as are most of our cosmetics, plastics, toothpaste, etc.). These have to be transported to the farm (increase in transportation costs), sometimes produce is wrapped in plastic (petroleum based) etc. So, fundamentals, input costs have risen in addition to transportation costs and this is what is driving price increases in everything. When Oil goes up (Energy) it runs through our entire economy and is ultimately experienced as a tax on the economy rather than inflation---thus leading to stagflation: soaring costs and prices cool the economy resulting in stagnation coupled with inflation! In such a case, the worst thing the FED could have done was raise interest rates.
Now, in an effort to restimulate the economy and undo the initial mistake made by raising interest rates, adding liquidity to the market caused the dollar to plunge, thereby increasing costs even moreso, since we operate in a global market for goods. This makes our products cheaper on the export market (a strategy used by China), but increases the price of everything else we import. Unfortunately, we have gone from being a producer nation to a nation that has outsourced everything except the financial sector---and even that is in the process of going elsewhere, given the instability of the dollar.
Corn is not the ideal crop for energy alternatives, however, it is obvious that any alternatives to Oil will be maligned to allow Big Oil to run things. The biggest problem lying ahead is not a shortage of food and its high cost, but a shortage of jobs to enable people to purchase any food at all, at any price. If all discretionary income is spent on filling the gas tank, businesses will fail, people will lose their jobs because no one is buying anything but fuel, and ultimately, the unemployed will have no money left to fill their tanks or their stomachs.