Tuesday, February 16, 2016

"What now for food prices, after link to crude prices weakens?"

Over the years I've mentioned that the rule of thumb is it takes around 10 crude oil calories to produce 1 row crop (mainly corn and soybeans) calorie.

Most other food prices are similarly dependent on their input costs.

From Agrimoney:
Can food continue to outperform crude? 
Up until last year, prices of food and crude oil had moved largely in tandem, according to Bank of New Zealand, flagging a "strong relationship" between the two. 
"For those who like formality, the correlation coefficient since 1990 is +0.92 and an even higher +0.94 for the period since 2000," said the bank, taking monthly data from the United Nations Food and Agriculture Organization as the basis for food values. 
Tied markets
The link between energy and ag values, which the bank said "is probably as old as the horse and cart", reflects factors including the growing use of crops in making biofuels, and the importance of oil and its kin as an input cost for farms. 
"Lower energy prices encourage more food production, other things constant," BNZ, with the extra output implying lower ag values too. 
Meanwhile, lower crude prices "reduce oil producers' ability to pay for food" too, a factor which has been noted, for example, in the Russian market (albeit with the impact clouded by the effects of sanctions and counter-sanctions). 
'Food prices have significantly outperformed' 
Still, the price link has broken down a bit since late 2014, with the slide in oil prices outpacing the drop in food values.."Food prices have significantly outperformed oil over the past year and a half," BNZ said.."It probably doesn't feel like it from a food producer's point of view given the decline in food prices. It is just that food prices haven't fallen as far as oil prices.".The shift has driven the price ratio of food to crude oil, which for the vast majority of the 2005-2015 period stood "in the low 2s" back above 4.0..The ratio has not stood above 4.0 for a sustained length of time since the 1990s (when it topped 10.0 at one point)....

Corn 362-0 up 4-0, Wheat 463-4 up 6-0 cents, WTI $29.03 down 41 cents. 

One oft-cited bit of nuttines is the fact it takes 127 calories of aviation fuel to get a head of lettuce from California to London. So transportation costs matter as well.