West Lafayette, Indiana
March 11, 2009
A trio of economic factors that
sent commodity prices soaring in mid-2008 has since reversed
course and is pushing prices lower, according to an updated
report by three Purdue
University agricultural economists.
"The three major drivers that we identified last year were
trends in global production and consumption, the value of the
dollar, and biofuels," said Wally Tyner, who, along with Philip
Abbott and Chris Hurt, released "What's Driving Food Prices?"
this past July. "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 and Hurt, who on Wednesday (March 11) present the update
in a Farm Foundation Forum at the National Press Club in
Washington, D.C., found that 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.
"And then the demand for biofuels is not near what we 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.
"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. 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."
Hurt said, "Some products like eggs, milk and dairy will have
lower prices this year. Others like meats may be close to
unchanged, and fruits and vegetables will likely still be
somewhat higher."
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."
Hurt said, "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."
To read the July 2008 "What's Driving Food Prices?" report and
update, go to the Farm Foundation Web site at
http://www.farmfoundation.org.
Farm Foundation is a non-profit organization promoting
non-advocacy agricultural policy analysis. The Oak Brook,
Ill.-based organization provides objective information on issues
shaping the future of agriculture, food systems and rural
regions. |
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