Surely Taking Corn out of the Market will Raise the Price
30 May, 2008 04:16 pm
I've been in conversation with David Benson, about the role of biofuels in the current round of food price rises across the world.
For what it's worth, I think there are a number of pretty likely reasons for the rise in food prices.
One of the most important is that the price of crude oil has risen over the past year from $65.5/bbl to $130/bbl . This hits the price of food because the price of harvesting it, moving it, processing it, distributing it and taking it home is influenced by the price of oil. This influence is greater in the developed world, where people eat more energy intensive processed food.
Another are distortions caused by trade and by protectionism. Most countries want to operate their agriculture at a surplus, this keeps prices to consumers down (which helps keep the peace) and farmers happy, through subsidies. There are often difficulties where this process ends, when local farmers can not compete with imports and when these get more expensive .
Thirdly, there are distortions in the world market. Protectionism isn't perfect and countries with too much excess production may sell their surpluses in foreign markets at or below their own cost of production and transportation. That's dumping, which spoils otherwise well balanced markets. (Fair trade is the best solution but there's no time for that now)
Fourthly, there are futures contracts. These allow farmers to fix the amount of money they will get when their crops are harvested. But also they allow speculators* to enter the market and trade the contracts amongst themselves.
*You may wish to call them investors.
Finally there is the level of production of crops and the demand for crops.
I'd put more weight on this aspect, than David does. I do this on the basis that taking 25% of the
The USDA says in its baseline prediction for 2008 to 2015 for corn.
Market adjustments to the increased demand for corn to produce ethanol extend well beyond the corn sector. Movements in relative prices trigger supply and demand adjustments for other crops. Higher feed costs affect the livestock sector, slowing increases in or reducing production of all meats over the next several years.If you reduced the volume of a big commodity like corn in a big producer it simply has to contribute to bringing supply and demand closer to balance. Once we get to balance then small distortions in supply will have big impacts on prices. This may be why the drought in
Originally published on: The Big Biofuels Blog