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Increasing Food Prices: It’s All About Oil, Speculation, Drought and Worldwide Demand

At a press conference Wednesday, leaders from farm and ethanol groups pointed to skyrocketing oil prices, hedge fund commodity speculators, growing worldwide demand for grain and severe droughts as the major factors underlying rising food prices. They also pointed to the expansion of biofuels as preventing even higher oil prices. The groups cited Merrill Lynch analyst Francisco Blanch’s estimate that oil and gasoline prices would be about 15 percent higher, or $4.14 a gallon at today’s prices, if biofuel producers weren't increasing their output.

“A complex set of factors are at work helping to drive food prices higher around the world,” said former Secretary of Agriculture John Block. “Singling out biofuels like ethanol for all or even the majority of the blame misses the boat. Ethanol production and use is helping to keep oil and gasoline prices lower than they might otherwise be and preventing the situation from getting worse. We must maintain the focus needed to address our reliance of foreign oil and not fall victim to the blame game. Biofuel production not only makes our nation more energy secure, but helps provide the market incentives necessary to drive innovation in agriculture around the world.”

The primary factors contributing to rising food prices include skyrocketing oil prices, surging global demand for grain and meat from nations like China and India, hedge fund speculation on commodity markets, droughts in Australia and elsewhere, a weak dollar encouraging exports, and agricultural policies around the world that have limited the productivity of farmers from Europe to Asia.

“Making corn ethanol the scapegoat for the high price of food is unwarranted,” said National Corn Growers Association CEO Rick Tolman. “Efforts should be made to look into the $128 billion profits of the oil industry. To put things into perspective, in 1999 a barrel of oil cost $10, compared to $120 today. Consumers lose when the oil industry plays a cat and mouse game with the American people. Truth be told, Americans are actually saving $69 billion each year at the pump thanks to biofuels.”

“I find it ironic that efforts to reduce our dependence on oil are being blamed for increased food costs when, in fact, record high oil prices are playing a far greater role in increasing grocery prices than ethanol production. America's farmers and ranchers have been feeding the world for more than 200 years and will continue to provide safe, high quality products while, at the same time, playing a significant part in reducing our addiction to oil,” said National Farmers Union President Tom Buis.

According to the Federal Reserve Bank of Kansas City, “…a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices. Since January, the price of oil is up approximately 30 percent.

Likewise, a recent study from Texas A&M University requested by Texas Governor Rick Perry concluded, “The underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs, evidenced by $100 per barrel oil.”

Similarly, an analysis conducted last June before the recent escalation in oil prices, notes, “Increases in energy prices for example exert a greater impact on food prices than does the price of corn. A 33 percent increase in crude oil prices – which translates into a $1.00 per gallon increase in the price of conventional regular gasoline – results in a 0.6 percent to 0.9 percent increase in the CPI for food while an equivalent increase in corn prices ($1.00 per bushel) would cause the CPI for food to increase only 0.3 percent.”

“Without question, the common denominator underlying all of the crises affecting the globe today is the skyrocketing price of oil,” said Renewable Fuels Association President Bob Dinneen. “With OPEC projections for oil soon reaching $200 per barrel, attempts to jettison the still-growing biofuels industry because of misplaced blame would relegate America and the world to more of the same. The fact is ethanol is helping reduce prices at the pump and keeping oil and gasoline prices lower than they might otherwise be. Considering the integral role oil plays in every part of the food production chain, forsaking ethanol would send both food and fuel prices still higher.”

The Center for Agriculture and Rural Development at Iowa State University estimates that the growth in ethanol production and use has caused gasoline prices to be $0.29 to $0.40 lower than they might otherwise have been.