Purdue Economists Present Update on Factors Driving Food Prices

Same trends that raised prices last year are pushing them down.

On Wednesday two agricultural economists from Purdue University spoke at a Farm Foundation Forum at the National Press Club in Washington, D.C updating their study released last July: "What's Driving Food Prices?"

"The three major drivers that we identified last year were trends in global production and consumption, the value of the dollar, and biofuels," said Wally Tyner. "One of the key questions we asked in doing this new study was, 'Are these same three that drove prices up the ladder now driving prices down the ladder?' The answer is yes."

Tyner and Chris Hurt said that the global financial crisis lead to a stronger American dollar, falling ethanol demand and rising grain stocks, which combined to send corn, soybean, wheat and rice prices cascading in late 2008.

"The dollar had lost about 67% of its value through July 2008, and since July it has gained 22% of that value back," Tyner said. "Since July, the expectations on supply and demand are that our stocks are going to be better than we thought since 2008 was a good production year and world demand has dropped. So supplies are not nearly as short now in terms of stocks-to-use ratios as they were before."

They also found that the demand for biofuels is not near what it was expected to be, therefore not as much corn is needed to make ethanol, so there is not near as much pressure on the price.

"Demand is down for everything," Tyner said. "In particular, demand is down more for meat products, which means less demand for the corn and soybean meal to produce meat. It filters through the system."

However it will take some time before those lower prices show up in meat, dairy and eggs. Poultry products are the quickest. For beef it's the longest time period - up to several years - and for pork it's somewhere in between.

"Some products like eggs, milk and dairy will have lower prices this year," Hurt said. "Others like meats may be close to unchanged, and fruits and vegetables will likely still be somewhat higher."

The problem for farmers is that production costs have not fallen as quickly as commodity prices. The economists say if commodity prices had stayed high, farmers could have supported those input prices, but that is not the case.

"It's going to be a tight margin year for farmers," Tyner said. "They came off of two really good years, but this year is going to be much different."

According to Hurt how governments and consumers respond to the downturn and how biofuels policy evolves in coming years will have a major impact on the future for agriculture, which is closely tied to the depth and duration of the current recession

To read the July 2008 "What's Driving Food Prices?" report and update, go to the Farm Foundation Web site at http://www.farmfoundation.org.

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