Corn, Soybean Oil Markets Will Continue to Be Driven by Petroleum: HighQuest Partners
Press Release -- BOSTON, MA -- Apr. 29, 2008 -- Over the past two years a fundamental change has occurred in the corn and vegetable oils markets: biofuels producers operating near break-even have become the price-setters … and the prices they are setting are tied directly to the price of petroleum. The implications of this new pricing dynamic defy past experience, and industry participants will be naturally skeptical. However, only by understanding the price-setting mechanism will business and policy decision makers be able to anticipate how these markets are likely to evolve.
Food inflation has become a front-page issue in the U.S. and in developing economies around the world, where food (as well as energy) is a larger share of typical family budgets. Food riots have broken out recently in countries from Egypt to Haiti, and the military has been called out to protect crops in Pakistan and Thailand.
The situation is different from crop to crop, and many factors are contributing to the global run up in food costs: droughts in key grain growing areas around the world; increasing wealth resulting in higher meat and grain consumption in Asia; record low global stocks; protectionist export tariffs; U.S. monetary policy; financial speculation; rising energy costs, and diversion of food crops for biofuel production.
Energy clearly exerts inflationary pressure on costs across the entire value chain from production, to transportation, to processing, to packaging. However, higher costs for fuel and for energy-intensive fertilizers account for only a small fraction of the run up in corn and vegetable oil prices. Biofuels, particularly U.S. corn-based ethanol and soy-based biodiesel, are under increasing attack as a major cause of global food inflation. The data do not support this view: the effect of biofuels on wheat and rice prices (which are up more than corn and soy) are minor compared to droughts and low stocks. However, in the limited case of corn and vegetable oils, biofuels in combination with rising energy prices are playing a significant and widely misunderstood role.
$6 Corn and 70¢ Vegetable Oil
Corn and vegetable oil represent only a part, albeit an important part, of the overall food inflation equation. Prices for corn and soybean oil (the primary commodity edible oil in the U.S.) have risen dramatically in the past 12-24 months.
In the face of these prices, cattle producers are struggling to cover rising feed costs which have gone from roughly $100 per head to as much as $320 at peak prices. Food processors and the food service industry are likewise facing margin pressures as costs for ingredients and cooking oils rise faster than they can pass the increases on to the consumer. The situation is worse abroad where raw commodities comprise a much larger share of consumer food costs. At the same time, biofuels operators are likewise feeling the squeeze: even with $100+ oil, plants built only a year or so ago are being idled because they cannot operate profitably given these prices for corn and soybean oil.
Most of the “discussion” on the topic of corn and vegetable oil prices is little more than thinly veiled advocacy, which not surprisingly has resulted in a good deal of confusion – and misinformation – over why prices have risen so far so fast.
What are the real economic forces at work and what is likely to happen next?
Download the full white paper by HighQuest Partners on this subject by clicking here.
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