Food Vs. Fuel - Food Price Inflation

Food Price Inflation

From 1974 to 2005 real food prices (adjusted for inflation) dropped by 75%. Food commodity prices were relatively stable after reaching lows in 2000 and 2001. Therefore, recent rapid food price increases are considered extraordinary. A World Bank policy research working paper published on July 2008 found that the increase in food commodities prices was led by grains, with sharp price increases in 2005 despite record crops worldwide. From January 2005 until June 2008, maize prices almost tripled, wheat increased 127 percent, and rice rose 170 percent. The increase in grain prices was followed by increases in fats and oil prices in mid-2006. On the other hand, the study found that sugar cane production has increased rapidly, and it was large enough to keep sugar price increases small except for 2005 and early 2006. The paper concluded that biofuels produced from grains have raised food prices in combination with other related factors between 70 to 75 percent, but ethanol produced from sugar cane has not contributed significantly to the recent increase in food commodities prices.

An economic assessment report published by the OECD in July 2008 found that "...the impact of current biofuel policies on world crop prices, largely through increased demand for cereals and vegetable oils, is significant but should not be overestimated. Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years."

Corn is used to make ethanol and prices went up by a factor of three in less than 3 years (measured in US dollars). Reports in 2007 linked stories as diverse as food riots in Mexico due to rising prices of corn for tortillas, and reduced profits at Heineken the large international brewer, to the increasing use of corn (maize) grown in the US Midwest for ethanol production. (In the case of beer, the barley area was cut in order to increase corn production. Barley is not currently used to produce ethanol.) Wheat is up by almost a factor of 3 in 3 years, while soybeans are up by a factor of 2 in 2 years (both measured in US dollars).

As corn is commonly used as feed for livestock, higher corn prices lead to higher prices in animal source foods. Vegetable oil is used to make biodiesel and has about doubled in price in the last couple years. The price is roughly tracking crude oil prices. The 2007–2008 world food price crisis is blamed partly on the increased demand for biofuels. During the same period rice prices went up by a factor of 3 even though rice is not directly used in biofuels.

The USDA expects the 2008/2009 wheat season to be a record crop and 8% higher than the previous year. They also expect rice to have a record crop. Wheat prices have dropped from a high over $12/bushel in May 2008 to under $8/bushel in May. Rice has also dropped from its highs.

According to a 2008 report from the World Bank the production of biofuel pushed food prices up. These conclusions were supported by the Union of Concerned Scientists in their September 2008 newsletter in which they remarked that the World Bank analysis "contradicts U.S. Secretary of Agriculture Ed Schaffer's assertion that biofuels account for only a small percentage of rising food prices."

According to the October Consumer Price Index released Nov. 19, 2008, food prices continued to rise in October 2008 and were 6.3 percent higher than October 2007. Since July 2008 fuel costs dropped by nearly 60 percent.