As many Americans adjust budgets to keep food on the table, a recent World Bank study says oil prices are the biggest driver behind food prices – and represent a reason to keep an eye on government policy.
Post-2004 across-the-board commodity price spikes, which seemed to resemble previous temporary trends, are now becoming more permanent, study authors John Baffes and Allen Dennis say. But that more permanent trend also coincides with price spikes in other areas, including energy, fertilizers and precious metals, leading study authors to develop an economic model which determines the correlation between commodities and other outlying drivers.
The model studied the food commodities maize, wheat, rice, soybeans and palm oil. In short, it compared commodity prices to energy prices, exchange rates, interest rates, inflation, income and a stocks-to-use ratio to determine which driver had the most impact on food prices.
Authors found that crude oil prices stood out among all of the drivers studied. Baffes says the magnitude of the post-2004 oil price jump is a key factor. Between 1997 and 2004 and 2005 to 2012, stocks of wheat declined by 17%, while oil prices increased by 220%.
"This explains why oil prices were responsible for almost two-thirds of the change in food prices," Baffes says.
Stocks-to-use was the second factor, though when studied in pre-2004 time periods, it was the largest driver behind food price movements.
Baffes points out that rice stood out from other commodities when compared against the stocks-to-use measure, explaining that it's likely a reflection of government trade policies, especially in East Asia. The paper notes that interest rates and income growth have little effect on price changes.
Study authors say that the model used, if extended to the 1950s, for example, would allow economists to examine how food prices behaved before macroeconomic fundamentals moved very little.
Another use for the measurement model, authors say, could be to examine the expansion of biofuels and determine if the movement has been driven by policies or profitability. Overall, however, Baffes says the findings from the study at hand will also have an impact on policy as-is.
"These findings have significant implications for governments calling for coordinated policy actions in the face of rising food prices. Clearly, stockpiling food is unlikely to be effective as a method to mitigate food price spikes; rather energy price movements will likely eclipse those efforts," he says.
The study comes as a benefit to the agenda of ethanol group Growth Energy, which says it illustrates that the "oil industry has been responsible for skyrocketing prices."
"The World Bank found that crude oil is responsible for more than half of the increase in food prices. Couple that with the nearly 100 percent increase in domestic gas prices over the same time frame, and the cost of oil has truly affected the well-being of all Americans in a very expensive way," Tom Buis, Growth Energy CEO, says.