Paul Krugman wonders about grain prices

Paul Krugman writes:

The financial crisis gets most of the attention from the business press — but in terms of sheer human impact, the current food crisis may well be a bigger deal.

Governments across the developing world are scrambling to boost farm imports and restrict exports in an attempt to forestall rising food prices and social unrest.

The moves mark a rapid shift away from protecting farmers, who are generally the beneficiaries of food import tariffs, towards cushioning consumers from food shortages and rising prices.

But economists warned that such actions risked provoking an upward spiral in global food prices, which have already been pushed higher by rising demand from emerging markets like China and India and pressure on land from the growing production of bio-fuels.

What I don’t quite understand is why food prices have spiked so dramatically. Demand has been rising for a number of years; bio-fuels is a big thing, but how much bigger is it this year than a year or two ago? It can’t be speculation: that raises prices by inducing stockpiling, and stocks of wheat and rice are at or near record lows.

Important stuff. We need to figure this out.

Perhaps the direction of causation is different? The assumption Dr. Krugman makes is that grain prices respond to changes in demand driven by using grains to produce of bio-fuels. Could grain prices be responding to rising grain production costs instead? A lot of the world’s food is grown in developed countries using capital-intensive techniques. Tractors and harvesters need fuel, many fertilizer production processes are notorious energy hogs. In the U.S., energy costs accounted for full half of 2004 operating costs for a wheat farm. Other grains were not far behind:

Source: USDA.

And here are some numbers regarding both per-acre and operating costs in 2004:

Source: USDA.

Assuming wheat yield of 50 bushels per acre and 2004 energy cost per acre of $50, energy cost per bushel of wheat in 2004 was about $1. During 2004, CBOT wheat traded in the $3-4 range, while NYMEX crude traded in the $30-50 range. Fast forward to 2008 and $100-a-barrel oil; energy cost per bushel should be between $2 and $3. I am no agricultural economist, so I can’t say with any degree of confidence whether this is enough to move wheat prices from $4 to $12 a bushel, but the upward pressure is clearly there.

The rising fuel costs pushing supply of grains to the left would be consistent with declining inventories though…

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