Two “persistent demand shocks”–corn for biofuels production and U.S. soybean exports to China–are in the “mix of factors” causing commodity and food price increases in recent months, according to a new study presented this week by the Farm Foundation. Other factors include weather-related production shortfalls, changes in cropping patterns, and a weak, volatile U.S. dollar.  The report explained the five key factors shaping today’s price situation and outlook.  These are:

  • Persistent demand shocks–specifically demands of the biofuels industry, particularly for corn, and China’s decision to import huge quantities of soybeans due to income growth and stocks-building.  Biofuels policy mandates and blending limitations have generated a large, persistent, and non-price responsive demand for corn.  While income growth and dietary improvements are drivers of rapid growth in Chinese soybean imports, a policy of stocks-building accounted for nearly 40 percent of the increase in Chinese soybean imports between 2008 and 2011.  Given China’s current level of stocks (estimated at a 23 percent stocks-to-use ratio), future import and demand increases are expected to follow income growth, as was the case prior to 2008.
  • Market in-elasticity–a reduction in the responsiveness of prices to demand and supply forces–is one of the key mechanisms in today’s commodity markets.  In 2005, 16.1 million acres of land in the United States were required to meet the demand for biofuels production and U.S. soybean exports to China.  In 2010, it took 46.5 million acres–an increase of 189 percent–to satisfy these demands, or 29 percent of total U.S. corn and soybean harvested acreage.  Globally, 70 percent of the expanded acres used to grow high-demand crops were new land being brought into production; 30 percent resulted from shifting acres out of other crops.  In the United States, where land area has been fairly stable, the new demands caused land to be reallocated from other crops.   U.S. subsidies and the Renewable Fuels Standard (RFS) mandate encourage domestic biofuels production, though the RFS is currently more important than the subsidy.  Changing either policy would have little near-term impact if oil prices remain high.  Production capacity already exists and companies could continue to produce without the subsidy.  However, if oil prices were lower, the impacts of subsidy and RFS changes would be significant.  Since 2008, higher feed prices caused livestock producers and market prices for all livestock products–meat, dairy, eggs–to adjust, making them better able to weather current feed price increases.  That means fewer livestock production capacity adjustments would be expected now, yielding a more in-elastic demand for animal feed components.
  • Weather and grain stocks–weather is more important in 2011 than in 2008.  Wheat and barley suffered weather-related production setbacks, but large stocks tempered price increases.  Corn stocks were drawn down when U.S. yields dropped in 2010.  Soybean stocks have remained tight as Chinese demand has surged.  Normal 2011-12 corn and soybean crop yields would barely allow the world to continue to meet trend consumption.  Tight world stocks for corn and soybeans cannot be overcome in one year of normal yields.  High prices will exist for two crop years or longer, before moderating to levels lower than 2011 peaks but higher than historic norms.  Slower demand growth from biofuels and China would give world supply a chance to catch up, but other events–new demand growth, the degree of supply response, or macroeconomic variables–will also be important in how this supply-price cycle plays out.
  • Chinese Policies–China has been a major holder of agricultural commodities but the stocks-to-use-ratio of each commodity has varied considerably over the past decade.  The policy to accumulate substantial soybeans stocks through imports is one example of the impact on world markets.
  • Macroeconomics–a weaker U.S. dollar contributed to a commodity boom between 2002 and 2008.   Today, changes are not as dramatic, but the dollar exchange rate remains weak and volatile.

The Farm Foundation commissioned the report from three Purdue University economists:  Philip Abbot (international trade and macro factors), Christopher Hurt (analysis of commodity markets), and Wallace Tyner (an energy and biofuels policies).   The report builds on similar reports written by the authors for Farm Foundation in 2008 and 2009.

During the briefing this week by the three authors, they predicted that food prices will not come down next year and prices will not fall back to historical levels for the foreseeable future, if ever.  Chicken was cited by the authors as the most adaptable of all livestock production and has responded relatively rapidly to feed price changes over the past few years.

To address high food prices, the report’s authors cited the need to adjust U.S. food policies to reflect food shortages rather than food surpluses, including the elimination of programs that increase demand (school lunch programs, ethanol mandates, food stamps, and export subsidies) or decrease supply (farm set-asides and the Conservation Reserve Program).  The full report What’s Driving Food Prices in 2011? is available on the Farm Foundation Web site at