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What's Driving Food Prices in 2011?

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What's Driving Food Prices in 2011? What’s Driving Food Prices in 2011? .YP] Preface ree years ago Farm Foundation, NFP asked Purdue University economists Wallace Tyner, Philip Abbot and Christopher Hurt to review the literature and provide a comprehensive assessment of the major factors driving commodity and food prices. Our objective was to cool the heated rhetoric in the food-versus-fuel debate, which had been rising right along with the prices of corn and oil. Today, although the rhetoric seems to be lower, prices of oil and commodities, including corn, soybeans and wheat, have again approached the levels of 2008. In addition, policy makers today are focused on a national debate over fiscal policy—a debate that encompasses the future direction of food, agricultural and energy policies. Farm Foundation commissioned the current paper to provide a comprehensive, objective assessment of the forces driving commodity and food prices. A major question was whether the forces at work today are the same as or different from those of 2008. Our goal is to provide public and private decision makers with an objective assessment of the forces driving commodity prices, as well as offer some insights into the impacts on policy options. Now, as in 2008, the full story behind rapid increases in commodity prices is not a simple one. Many of the factors driving prices remain the same but play out in different ways—including biofuel demands, exchange rates and weather. As concluded in 2008, one simple fact stands out: economic growth and rising human aspirations are putting ever greater pressure on the global resource base. As with the earlier work, this report does not attempt to attribute the proportion of the price increases among the different drivers. Rather the focus is on understanding the nature and interactions of the respective factors. In an environment of higher and more volatile commodity and food prices, as well as budget constraints, policy makers and society are faced with difficult choices about fundamental elements of food, agricultural and energy policies. We hope that the information provided in this report will strengthen the ability of all stakeholders to address some of the most critical public policy issues facing the world today. Neilson Conklin President Farm Foundation, NFP What’s Driving Food Prices in 2011? Philip C. Abbott Christopher Hurt Wallace E. Tyner We authors are agricultural economists on the faculty at Purdue University. Abbott works in international trade and macro factors. Hurt works in analysis of commodity markets. Tyner is an energy and policy economist most recently specializing in biofuels policies. We each brought a unique perspective to the table, and have learned from each other through many long conversations on the food price topic. We believe the final product reflects the in - sights gained through working as a multi-specialist team. is paper was prepared by the authors for Farm Foundation, NFP. We are indebted to Mary ompson for many useful editing suggestions. Helpful comments from Neil Conklin, Vern Eidman, Derek Headey and Peter Timmer are greatly appreciated. e authors are solely responsible for the content of this paper. Table of Contents List of Tables ...................................................................................................................................................ii List of Figures .................................................................................................................................................ii Executive Summary .......................................................................................................................................iii Introduction ...................................................................................................................................................1 Five Key Issues behind High Agricultural Commodity Prices ..........................................................................2 Issue 1: Big, Persistent Demand Shocks: Biofuels and Chinese Soybeans ......................................................2 Biofuels ......................................................................................................................................................2 Chinese Soybean Imports ...........................................................................................................................4 Land Use and Stocks ..................................................................................................................................4 Issue 2: Inelasticity .......................................................................................................................................6 Land Supply More Inelastic ........................................................................................................................7 Biofuels Policy Constraints .........................................................................................................................8 High Livestock Prices and Persistent Feed Demand ....................................................................................9 Grain Stocks and Futures Prices .................................................................................................................9 International Trade .....................................................................................................................................9 Issue 3: Weather and Stocks .......................................................................................................................10 Issue 4: Chinese Policy ...............................................................................................................................13 Issue 5: Macroeconomics Still Matters ........................................................................................................16 Weak Dollar Exchange Rate .....................................................................................................................16 Macroeconomic Performance and Commodity Booms ............................................................................17 Recession and Financial Crisis ..................................................................................................................18 Speculation ..............................................................................................................................................18 Implications for the Future ...........................................................................................................................19 Will Demand Surges Persist? ......................................................................................................................19 Short Term: Normal or Sub-Trend Yields? ..................................................................................................19 Normal Yields Not Likely to Restore World Supply in 2011-12 ...............................................................19 Sub-Trend Yields in 2011-12 ...................................................................................................................20 Longer-Term: Can Supply Catch Up? ........................................................................................................20 Demand Challenges and Opportunities ...................................................................................................22 Consequences Here and Abroad .................................................................................................................24 Policy Issues ..................................................................................................................................................24 Biofuels Policy ............................................................................................................................................24 Mandates and Subsidies ...........................................................................................................................24 Cellulosic Biofuels ....................................................................................................................................28 World Biofuels Policies .............................................................................................................................28 U.S. Agricultural Policy ..............................................................................................................................28 Policy of Abundance ................................................................................................................................28 Policy of Shortages ...................................................................................................................................29 Setting Priorities .......................................................................................................................................30 Trade Policy ................................................................................................................................................30 Domestic Stabilization .............................................................................................................................30 WTO Commitments ...............................................................................................................................31 Export Restrictions ...................................................................................................................................31
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