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Food vs. Fuel: Oil and Rising Food Prices

shutterstock_100066112Last week, the World Bank released a new report that further confirms what most of us have known for a long time — that rising crude oil prices are the biggest contributor to rising food prices. This may come as a shock to the growing hordes who believe the myth that corn for ethanol is the largest driver of food prices.

The authors of the study developed a logarithmic formula to help determine the impact of any given factor that contributes to food prices through a regression analysis. (You can review the full report for a detailed explanation of the formula and the study in general.) The study looked at five different internationally traded food commodities (corn, wheat, rice, soybean and palm oil) and examined the impact of the contributing factors to each of them.                        

World Bank Figure 3The researchers used the formula to determine the impact of oil prices, exchange rates, interest rates, stock-to-use ratio, GDP and the price of manufacturing exports on each of the five food commodities. This method led the World Bank researchers to conclude that for all of commodities studied, corn included, oil prices had the biggest impact. In fact, the analysis showed that oil prices were significantly more influential than the next-most influential factor, the stocks-to-use factor (a ratio of the available food stocks compared to consumption), and were even found to account for a full two-thirds of the rise of the price of wheat.

This last point handily dispels one of the main reasons that the “blame ethanol” crowd uses in its bashing of the fuel — that using corn for ethanol diminishes the supply available for human and animal consumption, thus raising its prices. As the report shows, even if stocks of corn do decrease because of ethanol production (which, given rising corn yields, doesn’t seem to be the case), that would only have a secondary effect on corn prices.

Finally, the report concludes that the implications of its findings are significant for developing policies to control food price inflation. It notes that increasing available food stocks is unlikely to control prices, and rather, controlling “energy price movements” would be a more effective way to tame food prices. By “energy price movements” I’m assuming the authors are mainly referring to the price of oil and not to other forms of energy, such as coal or solar power, because oil is the only source of “energy” that was examined in this study.

In the production and distribution of food, oil is used in everything from fertilizer production to powering farm equipment and transporting the food to consumers. In such context the World Bank report suggests that to stem rising food prices, the widespread famine inflicted on the world’s poorest countries, and the economic hardship exacted on the poor and working-class within the developed world, we must control oil prices.

Gal Sitty's picture

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janice regana's picture
janice regana on Jun 18, 2013

It’s not really a shock, it’s more of a sad recognition that once again, we’re being put in our seats by the big bosses. If I was thinking about starting a frozen yogurt business, I would definitely be stopped and asked if I know the price of crude oil and crude reality. This doesn’t seem like the right reception, does it?

Christian  Guillaume's picture
Christian Guillaume on Jul 3, 2013
Although a good point, I’m afraid to tell you that if the price of reality is unknown to you, you will most likely pay dearly for your business. Don’t get ready to become Donper America‘s competitor just yet, not until you’ve learned how everything goes.

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