This has been a record-setting year.  Corn, hogs and cattle are just a few of the agricultural commodities that have soared to new highs. 

But what’s behind those dramatic moves? Is it really ethanol’s growing demand for corn or the global population’s growing appetite? Yes, to both, but it’s a complicated web of factors and it won’t change dramatically any time soon.

A weak U.S. dollar, high oil prices, declining grain supplies and poor harvests in 2010 all have contributed to new commodity price realities, according to a report from Purdue University agricultural economists Phil Abbott, Chris Hurt and Wally Tyner. The report, “What's Driving Food Prices in 2011?” was commissioned by Farm Foundation, NFP.

Regular issues influencing retail food prices are, of course, commodity costs and inflationary pressures such as transportation, packaging and food processing. For 2011, the price rally also highlighted the reality that world food and fuel demands have been exceeding supply.

“In the United States, we’ve typically had more grain and soybeans than we could use,” Hurt says. “Now we have to ask ourselves, can the United States and the other major suppliers meet all these growing world demands?”

Among those is ethanol’s use of U.S. corn. It claimed 27 percent of the 2010/2011 corn crop, versus 10 percent of the 2005/2006 crop. In addition, there is China’s increasing desire for soybeans. “When you put them on top of each other, the price impacts are a lot bigger than either one separately,” Hurt notes.

The amount of U.S. farmland needed to meet just those two factors has jumped from 16.1 million acres in 2005 to 45.6 million acres in 2010. To do that, two things happened:

1) U.S. farmers moved land from cotton, wheat and sorghum into corn and soybeans. The result is higher prices for most crops.

2) U.S. grain stocks have dwindled such that minimal inventories are left to address any production shortage. Consequently, any yield threats mean high prices will linger.

China’s impact cannot be over-emphasized, and gaining true perspective of the volume needed to accommodate 3 billion people can be hard to comprehend. Because of China’s rapid economic growth, food demand has not only increased, it has shifted to more animal products, which require corn and soybeans to produce.

“However, we also found that about 40 percent of China’s increased soybean imports in recent years was due to building inventories,” Abbott says. “We believe they now have sufficient stocks, and their purchases could slow.”

People in China, India and elsewhere are using more crude oil. “Agriculture’s move into biofuels has linked the oil market to the corn market and to agricultural markets in general,” Abbott notes. “If oil is high-priced, it will tend to mean agricultural markets also are high and it all contributes to higher commodity prices.”

As an additional consequence, agricultural markets have become less responsive to price signals, leading to high prices and volatility. For example, U.S. corn used for ethanol is mandated by the government. It requires 12.6 billion gallons to be blended into gasoline this year and 15 billion by 2015. Such a requirement creates an inelastic market. “The amount of corn required for the United States to produce that ethanol will be used whether corn is $2 a bushel or $10 a bushel,” Tyner says.

Adding to inelasticity are foreign buyers who want basic food commodities — almost regardless of price — and to a degree, the livestock sector, as certain numbers of animals will be raised for food regardless.

High commodity prices eventually make their way into higher retail meat prices, and the shift to new higher base levels is underway.

As animal agriculture knows all too well, producers suffered heavy financial losses from late 2007 into early 2010, after feed costs escalated and a global recession set in. There have been some production cuts along the way, which pushed retail prices up in 2010 and to record highs for beef and pork this year.

Ethanol production has grown rapidly in the past five years, but the mandated rate is beginning to slow. While this means ethanol's expanded demand base will persist, it will not grow as quickly in the future.

Tempering the growth of ethanol’s corn use, as well as China’s soybean purchases could provide a chance for world grain supplies to “catch up.” Still, “it’s unlikely that we will return to having huge surpluses because the demand base remains so strong,” Hurt says. PK

A World of New Drivers

An example of the global marketplace driving supply/demand and commodity prices can be found in U.S. pork exports. Despite high prices, U.S. pork is expected to set a record this year, selling more than 22 percent of annual production overseas.

Through May, U.S. pork exports are up 16 percent in volume (916,763 metric tons) and 22 percent in value ($2.35 billion) over 2010, according to U.S. Meat Export Federation data. Consumers in South Korea, China and Japan are driving those results.

In fact, global exports are ahead of 2008’s record-setting pace. “If market conditions hold up reasonably well in the second half of the year,” says Daley Borror, USMEF economist, “U.S. pork export value will likely eclipse the $5 billion mark for the first time ever, breaking the 2008 record of $4.88 billion.”

 

Editor’s note: The Purdue University economists compiled a series of reports on U.S. and global commodity supply/demand, and price impacts. They are available at farmfoundation.org.