Friday, March 2, 2012

Do Food Commodity Prices Follow Oil Prices?

People always seem to be interested in the comparison of food commodity prices with oil prices and many have proclaimed that food equals oil.

This next graph going back to the 1950's, taken from this OECD publication, demonstrates that food prices have not followed very closely with oil prices. (Note that commodities are priced in USD's.)

Because the above graph is difficult to read, I've highlighted "food" and "crude oil" in blue and red in the following version:

Concerning this graph, from the report:
This graph shows the evolutions of IMF indices of market prices for primary commodities. The increase in food prices took place in the context of a general rise in commodity prices led by crude oil and metals. However, the 42% rise in food prices and in beverage prices over the period 2006-08 has been modest relative to crude oil prices (51%) but large relative to metal prices (8%).
What are some of the reasons that food prices don't necessarily follow oil prices?

While it is partly true in the industrial agricultural system that "food equals oil," there are many other factors which affect food prices, including the definition of "food" used in making the comparison. Below, I've listed some of them.
  • The dollar's value compared to currencies of other food exporting and importing nations.
  • Supply and demand.
  • Amount of food used for biofuel production.
  • Available infrastructure in transport and storage of food.
  • The price of natural gas.
  • Economic health of each nation.
  • The amount of global meat consumption.
  • Weather.
  • Population growth.
  • The percent of food wasted.
  • Transport prices (not always the same as oil prices, as, for example, currently we have excess bulk shipping capacity which has lowered shipping rates).
  • Government Ag policies and price support programs.
  • Trade agreements.
  • Geopolitics.

The OECD report, which was studying various influences upon price volatility in the agricultural commodities, concluded this:
In the current decade, the agricultural products that are shown to be the most correlated with the crude oil price, based on monthly data, are butter, whole milk powder and soybean oil. In the case of annual data, products with the highest correlations are maize, whole milk powder, wheat and butter. The least correlated are always beef and sugar.
Overall, the study did not find increased volatility in agricultural commodities in recent years as compared to the past fifty years, although the character of the global market has admittedly been changing.

There was one consistent finding most notable, which was not surprising:
The high price events of the past fifty years have typically followed a similar pattern – a price hike in one year followed by a sharp drop in the following year - for most commodities. In addition, past surges in aggregate agricultural prices, as represented by an index of food prices took place in the context of a general rise in almost all commodity prices, crude oil and metals in particular.
Ahh, yes, the laws of supply and demand.

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