Thursday, July 28, 2011

Co-Dependency: High Petroleum Prices, Low Dollar Value, High Food Prices

photo: Cornell

This post seems timely while we are worrying about the USD's valuation. Historically, other nations tend to buy U.S. Ag commodity exports when the dollar falls, as we've been a major Ag commodity exporting nation. World Ag export competition is increasing, however.

One problem is that when the dollar falls, our Ag input costs go higher due to imported energy costs. As our "leaders" desire to increase exports to help out our balance sheet, dollar devaluation helps, but we've got that oil elephant-in-the-room, in this nation built upon fundamentals which rely upon cheap energy, including our agricultural system.

In addition, we import a large amount of our agricultural products these days, though we maintain an export surplus. (See posts linked below.)

Recently, the USDA released a report [pdf] on the issues surrounding high food prices, which included energy costs:

A monthly food commodity price index compiled by the International Monetary Fund (IMF) trended down from 1980 until the end of 2001 and then began to rise. During the 5 years from January 2002 to January 2007, the index rose 47 percent. Over the next 18 months, the price index accelerated (rising 56 percent) and stood 130 percent above the January 2002 level. During the next 6 months, the index declined 33 percent. After reaching a low point in December 2008, the index rose 59 percent through April 2011 and stood 6 percent above the previous June 2008 record.

Crude oil prices rose sharply from early 2002 to mid-2008, much of which reflected increased crude oil demand caused by robust world economic growth and rapid manufacturing growth in China, India, and other Asian countries. The largest increases were from early 2007 to mid-2008, when oil prices more than doubled. In July 2008, monthly average crude oil prices surpassed $130 per barrel.
The IMF’s monthly crude oil index was 594 percent above January 2002. The weakening of the global economy toward the end of 2008 and into 2009 resulted in a decline in demand for petroleum and other energy sources. By early 2009, crude oil prices were down about 70 percent from their peak.

Following the 2009 global recession, economic growth improved and was particularly robust in the more energy intensive economies of low- and middle-income countries. This growth increased the demand for energy and the price of crude oil rose sharply—even more than food commodity prices. By April 2011, oil prices had almost tripled since the low point in December 2008.

Although oil prices were still well below the 2008 peak, the renewed rise appears to have moved crude oil prices back toward a longer run upward trend that was interrupted by the global recession.

The report concludes:

"Prospects for the future path of prices depend on many developments. As before, high prices will provide incentives to increase global agricultural production. Farmers around the world will make production decisions about allocating available land to various competing crops and about how much additional production inputs to use. With average weather over the next year or so, world agricultural production would be expected to increase and prices would retreat."

source: usda

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