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What’s Driving Food Prices? March 2009 Update

What’s Driving Food Prices? March 2009 Update

Despite reversal of conditions, complexity and
drivers of food prices remain unchanged

In July 2008, crude oil prices were at record levels, as were most agricultural commodity prices.  Low supplies generated fears of food shortages.  The rhetoric of the food-versus-fuel debate rose along with food prices.  Today, despite remarkable course changes, the key drivers of food prices and their complex interactions remain the same, according to a new Farm Foundation report,  What’s Driving Food Prices? March 2009 Update.

This new report updates the analysis Purdue University economists Phil Abbott, Chris Hurt and Wally Tyner did just nine months ago for the Farm Foundation report, What’s Driving Food Prices?  That report, released in July 2008, identified three major forces driving food prices:

In the second half of 2008, each of these driving forces reversed direction.  A world financial crisis put the brakes on world income growth.  Global crop production returned to more favorable levels for both the 2007/2008 and the

2008/2009 crops, as both production area and yields increased.  After July 2008, the exchange rate of the U.S. dollar appreciated against major currencies.  Energy prices collapsed, influenced by changes in income and exchange rates.  Lower energy prices constrained the profitability of ethanol, contributing to weaker commodity prices.

“The transitions were truly remarkable—almost a 180-degree course change—yet the key drivers of food prices remain the same:  supply and utilization of grains and oilseeds; the exchange rate of the dollar and related world macroeconomic factors; and the energy/agriculture linkage,” says Tyner, one of the three report authors.  “Our updated analysis verified the role of the key drivers, although they sometimes play out in somewhat different ways.”

Farm Foundation’s July 2008 report and this update confirm the linkages of the three key drivers of food prices.  “Whether the future takes prices up or down depends on many unknowns—not the least of which are the depth and recovery characteristics of the current global financial crisis and recession,” Tyner says.  Other unknowns include the potential for inflation and its possible influence on commodity prices, the direction of the U.S. dollar exchange rate, the price of crude oil and agricultural commodities.

“Understanding the function of the driving forces of food prices is critical in helping public and private leaders make informed decisions about business strategies and public policies,” says Farm Foundation President Neil Conklin.  “Farm Foundation commissioned the first report to provide a comprehensive, objective assessment of the forces driving food prices.  Building on that analysis, this update further broadens that information base.”

As part of the first report, Abbott, Hurt and Tyner reviewed recent studies on the world food crisis.  The March 2009 Update report includes an annotated bibliography of studies released since June 2008.

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