Press Release of Senator Lugar Purdue study shows complex causes of soaring food and fuel costs Wednesday, July 23, 2008 A new report from Purdue University underscores the complex events that drive the soaring costs of food and fuel.   “This report underscores the problem in assigning blame to a particular bogeyman, be it biofuels, speculators, manipulative suppliers, or more lavish consumers. It highlights the underappreciated effects of the depreciated dollar and how petroleum prices push up the cost of farm production and demand for biofuels,” Lugar said.   “It says that, ‘The dollar depreciation is surely a natural response to the unprecedented trade deficits the United States is realizing.’ The study points out that the 2006 trade deficit was $759 billion. By comparison oil and gas imports were $326 billion – or the equivalent of 43 percent of the trade deficit.   “Reducing this dependency on foreign fossil fuels will improve the trade balance, the dollar, our economy and national security,” Lugar said.      The study “What’s Driving Food Prices?” was prepared for the Farm Foundation (http://www.farmfoundation.org/news/templates/template.aspx?articleid=404&zoneid=26) and identified three broad sets of forces driving food price increases: • global changes in production and consumption of key commodities, • the depreciation of the dollar, and • growth in the production of biofuels.   Among the findings in the study:   “Most commodities, including crude oil and grains are priced in U.S. dollars, but are purchased in the local currency. When the dollar falls, as it has over the past six years, there is a link with rising commodity prices. The link between the U.S. dollar exchange rate and commodity prices is stronger and more important than many other studies imply. The decline of the dollar is linked not only to higher demand for U.S. agricultural commodity exports, but also to higher oil prices.”   “Higher crude oil prices have pushed up the cost of producing agricultural commodities through increases in the price of inputs, such as fertilizer and diesel, but the long-term impact of these increases has yet to be felt.”   “Crude oil’s strongest and most direct impact on food prices has been through its effect on the demand for biofuels.”   “Another side of the higher commodity price story that has gotten relatively little attention is the potentially large supply response that could result as farmers in developing countries increase production and productivity. Higher prices could induce these farmers to purchase and use inputs such as improved seeds and fertilizer, which would lead to substantial increases in productivity and economic gains. For this to happen, governments would have to permit higher prices to be transmitted to farmers.”   “China’s rapidly growing oil imports have had an indirect effect on food prices by impacting world prices for crude oil.”   “…ending stocks (of all agriculture commodities) are so small that they reach minimum or ‘pipeline levels. This means total stocks will be used up at the time the new crop is ready to harvest. When market participants perceive that consumption will exceed available supplies such that stocks will drop below pipeline levels, prices rise to ration out the short supply…This general pattern of consumption exceeding production since early this decade emerges…(as) rising world incomes have continued the trend of rising consumption of basic food products, including animal protein consumption.”    The report also concludes that investment is lagging in agricultural research with the goal of increasing productivity. This was part of recommendations that Sen. Lugar made to President Bush before the G-8 summit earlier this month: http://lugar.senate.gov/energy/food/G8Memo.pdf. Lugar expounded on these recommendations in a speech at the American Enterprise Institute on July 2 http://lugar.senate.gov/energy/press/speech/AEI.cfm.   The report was prepared by Purdue economists Phil Abbott, Chris Hurt and Wally Tyner.   # # #