Saturday, April 26, 2008

Why are food prices rising?

After watching the news today, I reflected on the four root causes listed for the recent spike in food prices: (1) using food for fuel, (2) the rising price of oil, (3) the low U.S. dollar, and (4) a bad weather season for crops. Note that the order listed doesn’t represent the magnitude of each cause. First, interestingly enough, many people that argue that corn used for ethanol is okay, don’t realize that the surplus of corn grown often results in farmers choosing to plant more corn over soy, wheat, and other staple crops that are vital to the American diet. Rice prices have also started to increase. The Sam’s Club has limited rice purchases to 4 of the 20 lb bags per customer ( Also, when farmers realize that they may reap more profits by selling their corn for ethanol production instead of food, they will be encourage to sell more of their crop for ethanol. This will inevitably result in significantly higher food prices not just for corn, but soy, wheat, and other crops. Second, the rising price of oil, whether by a shortage of crude or a shortage of refined oil, affects the price of food since the transportation of crops and fertilizers consume oil. In addition, tractors and other harvesting machinery consume oil, also contributing to higher food prices. Third, the low U.S. dollar has caused Americans to pay more for food as well as other products. The low dollar has also encouraged many wealthy investors to invest overseas to gain a higher interest rate since the Fed. recently reduced U.S. interest rates. The lower interest rates mean that many U.S. savings accounts and money market accounts are not earning as much in a poor economy as they were in a healthy economy, making it more difficult to compensate for a higher priced economy. Fourth, bad weather has caused an increase in food prices not just in the U.S., but world wide. Riots have broken out in many countries due to food shortages or exuberantly high food prices. Not to say that this scenario may play out in the U.S., but it can’t hurt to stock up the pantry. See “Load up the Pantry” by Brett Arends (

I’m certain that there are other reasons for high food prices in addition to the four listed, and I look forward to reading your comments. In the mean time, I’m going to be stocking up (which will probably, ironically, increase food prices by increasing demand; it’s a full circle, isn’t it?).


Jason Cullen said...

I've got to say I believe that demand for corn based ethanol is impacting the price of food.

The link below illustrates corn prices on the CBOT over the past 9 years. The run up in prices is recent event that only started in late 2006.

The link below illustrates US corn production in billions of bushels. Up until 2006 is seems farms may have been able to keep up with demand. You'll notice that production jumped from the 9 billion bushel range to the 11 billion bushel range for the few years prior to 2006. This seemed to keep prices relatively stable.

Makes sense, increasing supply fulfilled by increasing demand leaves prices relatively unchanged.

Late 2006 seems to be where the trend breaks, over the past year the US produced record levels of corn and prices have skyrocketed.

It seems like we've finally outstripped supply. Not surprising when 18% of the US corn crop in 2007 was used for ethanol production (this number is supposed to increase to over 30% in 2008).

John Losinger said...

I agree with Jason. Because the US is a large food exporter, our 18 percent decrease in corn exports has a large effect on world food prices.

For more info on energy-food price linkages, see the recent report by the International Food Policy Research Institute:

See also my earlier post:

JR Ewing said...

I agree that the increases in corn prices over the last few years have been a result of increased demand for corn for use in ethanol. Increases in corn priceshave and will shift land from producing other crops to producing corn, but this shift is not instantaneous. Large capital expenditures are often needed to purchase equipment, and crops in the ground take time to grow.

I believe that the recent run up in food prices are by far a result of increased fuel costs. Being a weekend rancher and having an undergraduate degree in Agricultural Economics, I've come to realize just how big a cost fuel represents for farmers and ranchers. I've come to the conclusion that such large price increases in a such a major agricultural input have to be the cause of these increased commodity prices.