fluctuations disappear, and CPI appears relatively stable over the same time period.
Food prices were forecasted to increase by about 3.5-4.5 percent in 2012, which Smith said is within the high end of the normal range.2 Most of that increase was among animal products (meats, poultry, fish, and fats and oils), as well as cereals/bakery and fruits/vegetables; most of it was a result of increasing commodity and energy prices. Commodities serve as the basis for production, which itself accounts for about 10 percent of the U.S. “food dollar” (i.e., a breakdown of expenditures for a dollar of food) (Figure 2-1). Energy accounts for another 5 percent. Together, changes in production and energy costs “really move” food prices from year to year.
Commodity prices themselves are affected by many variables, including energy prices, stocks-to-use ratio, and weather. For example, between 2000 and 2011, fluctuations in the index price of food more or less paralleled fluctuations in the index price for crude oil. With respect to stocks-to-use ratio, which is a measure of how much of a particular commodity is stored in comparison to how much is being used, the lower the ratio, the less stable the prices of food and the more likely that a widespread unexpected event, such as a flood or a drought, impacts those prices. The stocks-to-use ratio for total world grain and oilseeds has been dropping every month since June 2010, exacerbating other factors affecting prices. Finally, weather is another major driver of commodity price fluctuation. For example, a 2010 drought in Russia damaged about 25 percent of the global supply of wheat, driving wheat prices up. Additionally, some longer term trends could affect commodity prices in the future. Prime among these factors are climate change and water scarcity.
In addition to commodity and energy prices impacting short-term fluctuations in food prices, there are other underlying factors impacting long-term trends in food prices. A key one is that the global population is not only growing, but it is also becoming more affluent, driving a greater demand for high-value foods, like meats. When demand goes up, prices go up. A second key trend is the growing demand for biofuels. In the United States, an increasingly larger proportion of the corn crop is being used to produce ethanol. In other countries, an increasingly larger proportion of sugar cane crops is being used for the same reasons. Ethanol production was expected to increase by 333 percent between 2005 and 2030. Likewise, production of biodiesel is rapidly increasing worldwide. In the United States, most biodiesel production uses soybean oil. Again, as demand goes up (i.e., the demand for corn, soybeans, etc.), so too does price (i.e., of corn, soybeans,
2 This number reflects the forecasted price inflation at the time of the workshop. Given the extreme drought that occurred between the time of the workshop and the publication of this report, a much higher increase in food prices is expected.