Price of Food

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Food Science and Technology Series
THE PRICE OF FOOD
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FOOD SCIENCE AND TECHNOLOGY SERIES
Food Science and Technology: New Research

Lorenzo V. Greco and Marco N. Bruno (Editor)
2008. 978-1-60456-715-1
The Price of Food

Meredith N. Fisher (Editor)
2009. 978-1-60692-440-2
Food Science and Technology Series
THE PRICE OF FOOD
MEREDITH N. FISHER
EDITOR
Nova Science Publishers, Inc.

New York
Copyright © 2009 by Nova Science Publishers, Inc.
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LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA
ISBN: 978-1-61324-055-7 (eBook)
Published by Nova Science Publishers, Inc. New York
CONTENTS
Preface vii
Chapter 1 Price Determination in Agricultural
Commodity Markets: A Primer 1
Randy Schnepf
Chapter 2 Global Agricultural Supply and Demand:
Factors Contributing to the Recent Increase
in Food Commodity Prices 49

Ronald Trostle
Chapter 3 Biofuels, International Food
Prices, and the Poor 85
Joachim von Braun
Chapter 4 Food Price Inflation: Causes and Impacts 93
Tom Capehart and Joe Richardson
Chapter 5 High Wheat Prices: What Are the Issues? 103
Randy Schnepf
Chapter 6 Testimony of Jared Bernstein, Economic
Policy Institute, House Committee on the Budget
of the United States House of Representatives,
Rising Food Prices: Budget Challenges,
July 30, 2008 113
Economic Policy Institute
vi Contents
Chapter 7 Testimony by Steve H. Hanke, Applied

Economics, the Johns Hopkins University
and the Cato Institute on Rising Food Prices:
Budget Challenges before Committee on the
Budget, United States House of
Representatives, July 30, 2008 123
Chapter 8 Testimony of Jack Huttner, Biorefinery
Business Development, Genencor, to the Senate
Committee on Energy and Natural
Resources Hearing: “The Relationship
between Us Renewable Fuels Policy
and Food Prices”, June 12, 2008 129
Chapter 9 Statement of Joseph Glauber, before
the Committee on Energy and Natural
Resources, United States Senate,
June 12, 2008 135
Chapter 10 Statement of Joseph Glauber, before the
Joint Economic Committee, U.S. Congress,
May 1, 2008 153
Index 169
PREFACE
U.S. food prices never seem to decline. Higher farm commodity prices and
energy costs are the leading factors behind higher food prices. Farm commodity
prices have surged because (1) demand for corn for ethanol is competing with
food and feed for acreage; (2) global food grain and oilseed supplies are low due
to poor harvests; (3) the weak dollar has increased U.S. exports; (4) rising
incomes in large, rapidly emerging economies have changed eating habits; and (5)
input costs have increased. Higher energy costs increase transportation,
processing, and retail costs. Although the cost of commodities such as corn or
wheat are a small part of the final retail price of most food products, they have
risen enough to have an impact on retail prices. Generally, price changes at the
farm level have a diminished impact on retail prices, especially for highly
processed products. The impact of higher food prices on U.S. households varies
according to income. Lower-income households spend a greater portion of their
income on food and feel price hikes more acutely than high-income families.
Higher food costs impact domestic food assistance efforts in numerous ways
depending on whether benefits are indexed, enrollments are limited, or additional
funds are made available. Higher food and transportation costs also reduce the
impact of U.S. contributions of food aid under current budget constraints.
In: The Price of Food ISBN: 978-1-60692-440-2
Editor: Meredith N. Fisher, pp. 1-47 © 2008 Nova Science Publishers, Inc.
Chapter 1
PRICE DETERMINATION IN AGRICULTURAL

COMMODITY MARKETS: A PRIMER*
Randy Schnepf
ABSTRACT
This article provides a general description of price determination in

major U.S. agricultural commodity markets for wheat, rice, corn,
soybeans, and cotton. Understanding the fundamentals of commodity market
price formation is critical to evaluating the potential effects of government
policies and programs (existing or proposed), as well as of trade agreements
that may open U.S. borders to foreign competitors. In addition, an
understanding of the interplay of market forces over time contributes to
flexibility in making policy for what may be short-term market phenomena. The
general price level of an agricultural commodity, whether at a major
terminal, port, or commodity futures exchange, is influenced by a variety of
market forces that can alter the current or expected balance between supply
and demand. Many of these forces emanate from domestic food, feed, and
industrial-use markets and include consumer preferences and the changing
needs of end users; factors affecting the production processes (e.g., weather,
input costs, pests, diseases, etc.); relative prices of crops that can substitute in either
production or consumption; government policies; and factors affecting storage and
transportation. International market conditions are also important depending on
*
This is an edited, excerpted and augmented edition of aCRS Report RL33204, dated January 6,
2006.
2 Randy Schnepf
the “openness” of a country’s domestic market to international competition, and

the degree to which a country engages in international trade.
A distinguishing feature of U.S. commodity markets is the importance of futures
markets. Unlike cash markets which deal with the immediate transfer of goods,
a futures market is based on buying (or selling) commodity contracts at a
fixed price for potential physical delivery at some future date. A futures exchange
provides the facilities for buyers and sellers to trade commodity futures
contracts openly, and reports any market transactions to the public. As a result
of this activity, futures markets function as a central exchange for domestic
and international market information and as a primary mechanism for price
discovery, particularly for storable agricultural commodities with seasonal
production patterns.
The U.S. Department of Agriculture (USDA) plays a critical role in
monitoring and disseminating agricultural market information. Commodity
markets rely heavily on USDA reports for guidance on U.S. and
international supply and demand conditions. The release of USDA supply
and demand estimates has the potential to substantially alter market
expectations about current and future commodity market conditions and
are, therefore, closely watched by market participants.
In general, certain characteristics of agricultural product markets set them
apart from most non-agricultural product markets and tend to make agricultural
product prices more volatile than are the prices of most nonfarm goods and
services. Three such noteworthy characteristics of agricultural crops include
the seasonality of production, the derived nature of their demand, and generally
price-inelastic demand and supply functions. In addition, wheat, rice, corn,
soybeans, and cotton each have certain unique structural characteristics that
further differentiate the nature of market price formation from each other.
INTRODUCTION
This report focuses on the major factors affecting price formation for the five
largest U.S. program crops — wheat, rice, corn, soybeans, and cotton.[1]
According to the U.S. Agricultural Census, these five crops accounted for 67% of
harvested crop land in the United States in 2002.[2] Certain common characteristics
make a general description of market price formation relevant across this diverse set of
commodities: each of these crops is produced annually; under modest conditions
they are all storable for long periods of time (potentially spanning several years);
they all move from farm to market in bulk form; and they are all actively traded on
at least one of the major commodity futures exchanges which facilitates hedging
and forward contracting. In addition, frequently several or (in some cases) all of
Price Determination in Agricultural Commodity Markets: A Primer 3
them compete for the same crop land in production, thus, indirectly linking their
prices across markets.
This report begins by briefly introducing some economic fundamentals common
to most agricultural commodity markets. This is followed in the second section by
a discussion of the role of futures markets in price determination of storable
agricultural commodities with seasonal production patterns. The third section
reviews the important role provided by the U.S. Department of Agriculture (USDA)
in monitoring and disseminating agricultural market information. The release of
timely information facilitates price discovery and helps to level the playing field
between small market participants and the large multinational agri-businesses. The
fourth and final section highlights some of the differences unique to each of these
commodities that make price determination in each market somewhat different.
AGRICULTURAL COMMODITY MARKET

FUNDAMENTALS MARKET STRUCTURE AND PRICES
Price (P*) represents the equilibrium point where buyers (i.e., demand) and
sellers (i.e., supply) meet in the marketplace (Figure 1). New market information
(e.g., crop failure in a foreign market, widespread animal disease outbreak, a major
revision to a previous crop production estimate, etc.) can alter the expectations of
market participants and lead to a new equilibrium price as sellers revise their offer
prices and buyers revise their purchase bids based on the new information.
An outward shift in demand from the market equilibrium (due, for example, to
news of a foreign crop failure raising expectations for increased U.S. exports) would
raise the price P* as Demand moves to the right along the Supply curve. Similarly,
an outward shift in supply from the market equilibrium (due, for example, to an
upward revision in the planted acreage estimate by USDA raising expectations for
higher production) would lead to lower price P* as Supply moves to the right along
the Demand curve. Both of these hypothetical price changes would only be short-
term. In the long-run, producers would alter their planting decisions in light of the
new price expectations.
4 Randy Schnepf
Figure 1. Price Represents the Equilibrium of Supply and Demand.
The speed and efficiency with which the various price adjustments occur
depend, in large part, on the market structure within which a commodity is being
traded. Common attributes of market structure include the following.
• The number of buyers and sellers — more market participants are

generally associated with increased price competitiveness.

• The commodity’s homogeneity in terms of type, variety, quality, and end-use
characteristics — greater product differentiation is generally
associated with greater price differences among products and markets.
• The number of close substitutes — more close substitutes means buyers
have greater choice and are more price sensitive.
• The commodity’s storability — greater storability gives the seller more
options in terms of when and under what conditions to sell his products.
• The transparency of price formation, e.g., open auction versus private
contracts — greater transparency prevents price manipulation.
• The ease of commodity transfer between buyers and sellers and among
markets — greater mobility limits spatial price differences.
• Artificial restrictions on the market processes, e.g., government policies or
market collusion from a major participant — more artificial restrictions
tend to prevent the price from reaching its natural equilibrium level. Some
restrictions (e.g., import barriers) limit supply and keep prices high, while
other types of restrictions (e.g., market collusion by a few large buyers) may
suppress market prices.
What’s Behind Market Price Differences
The general price level of an agricultural commodity, whether at a major

terminal, port, or commodity futures exchange, is influenced by a variety of market
forces that can alter the current or expected balance between supply and demand.
Many of these forces emanate from domestic food, feed, and industrial-use markets
and include consumer preferences and the changing needs of end users; factors
affecting the production processes (e.g., weather, input costs, pests, diseases, etc.);
relative prices of crops that can substitute in either production or consumption;
government policies; and factors affecting storage and transportation. International
market conditions are also important depending on the “openness” of a country’s
domestic market to international competition, and the degree to which a country
engages in international trade.
Local Supply and Demand Conditions

Differences in grain and oilseed prices throughout the world reflect
differences in local supply and demand conditions (as well as differences in local
market structures). In general, grain and oilseed prices are lower in the inland
producing regions where they are in surplus, and higher in grain and oilseed
deficit, densely populated and port regions where demand exceeds local
production. Similarly for cotton, prices are lowest in the production zones,
and highest around processing centers and textile mills.
Product Characteristics
Today’s market participants tend to be very sophisticated buyers who
carefully compare the price of different agricultural commodities in terms of
their cost per unit of desired end-use characteristic. As a result, supply and
demand conditions in agricultural markets — whether it be markets for export, feed
rations, fresh products, food processing, or textile manufacturing — may depend on
a commodity’s particular variety, quality, or end-use characteristic more than the
overall supply of the generic commodity. For example, a flour processor may
base wheat purchase decisions primarily on the specific variety of wheat and its
particular milling and baking characteristics. A yarn or textile manufacturer may
select cotton based on its fiber color, strength, or length depending on the intended
processing outcome. A livestock or poultry operation strives for the least-cost,
balanced ration (depending on the type of animal) that includes sufficient protein,
carbohydrates, fats, vitamins, and roughage. An ethanol plant may select corn
based on its starch content, while a food processor may prefer corn with an above-
average oil content.
6 Randy Schnepf
Transfer Costs
Key components of the U.S. grain and oilseed handling network include on-
farm storage, trucks, railroads, barges, and grain elevators (including county,
sub-terminal, and export elevators). A complex web of local supply and demand
conditions determines how and when commodities move through this network. Price
changes at any point along the chain can result in shifts to alternate transport
modes or routes as grain marketers search for the lowest-cost method of moving
grain between buyer and seller.
For grains and oilseeds, prices at the local country elevator are derived from a
central market price less transportation and handling costs. Country elevator
managers watch the prices in several markets (whether a processing plant, feedlot,
export terminal, or futures exchange) to determine where the demand is the greatest,
then deduct transfer costs to the higher-priced market in determining the bids they
can offer local producers. In competitive markets, transfer costs — loading or
handling and transportation charges — are usually the most important factors in
determining spatial (i.e., location-based) price differentials. In the international
marketplace, transfer costs include barriers to trade such as tariffs and quotas. The
more it costs to transport a commodity to a buyer, the less the producer will receive
and vice versa. Price differentials between regions cannot exceed transfer costs for
very long as marketers will quickly move commodities from the low-priced markets
(raising prices there) and ship them to the higher-priced markets (lowering prices
there).[3]
From the farm to the processing plant or export terminal, trucks, trains,
and barges compete and complement one another in moving grain to successively larger
elevators. Shipping distance often determines each mode’s particular role. Trucks
traditionally have an advantage in moving grain for shorter distances (less than 250
to 500 miles) and therefore function primarily as the short haul gatherers of grain
product. Railroads have a cost advantage in moving grain long distances, but barges
have an even greater cost advantage where a waterway is available.[4]
Most economists and market analysts agree that inexpensive barge transportation
helps hold down rates charged by the rail and truck transportation industries.
Any disruption to the agricultural transportation network generally results in
higher transportation costs throughout the system as the demand for transportation
services shifts to alternate modes and routes in search of the next best means of
moving production to market. For example, a weather event that dramatically slows
or severely limits barge traffic on the Mississippi River will have the effect of raising
barge freight rates as the demand for barge services exceeds their supply. Higher
barge freight rates for grains will in turn shift these commodities to alternate uses
(feed, food, industrial, or storage), to alternate transport modes (rail or truck), or to
alternate trade routes (e.g., to the Atlantic via the St. Lawrence Seaway, or overland
to Canada, Mexico, or alternate ports along the Gulf coast or as far away as the
Pacific Northwest). Because truck and rail are significantly more costly than barge
transport, shifting bulk commodities to truck- or rail-based routes can substantially
raise the cost of moving grain and result in a widening basis and falling prices in
interior positions.
Government Policies
Several of the major field crops grown in the United States (including wheat,
corn, barley, sorghum, oats, rice, soybeans, peanuts, and cotton) receive
support under different types of government programs.[5] Annual direct
commodity payments have averaged over $18 billion in the United States during
the eight-year period, 1998/1999 to 2005/2006.[6] The intended function of
government programs vary from direct price support under commodity loan
provisions to conservation management. Because of their influence on per-acre
returns, government programs play an important role in the crop selection and
marketing decisions of agricultural producers.
The degree of influence of government programs varies greatly from commodity
to commodity. But, in general, government programs increase the incentives to
produce the crop receiving support. As a result, the supply of government-supported
crops available to the market tends to be larger than the supply actually demanded by
the market under the supply and demand conditions that would prevail in the absence
of government programs. The consequence of over-supply is lower price.
The United States is not alone in the support it provides through government
programs to its agricultural sector.[7] Most of the other major agricultural
producing countries provide some form of support, although in many cases it is in the
form of border protection (via tariffs, quotas, and other import restrictions), state-
sanctioned monopolies (e.g., the Canadian Wheat Board), rural infrastructure
development, or agricultural research rather than direct payments.
Key Role of Market Information
Commodity prices reflect the equilibrium between supply and demand at a

particular location for a given moment in time. However, the market equilibrium and
its associated price level are constantly changing as new information is received by
market participants. The tremendous breadth of relevant information spanning global
markets would appear to give an advantage to the large multi-national agricultural-
based companies such as Cargill, Archer Daniels Midland, and Bunge that have
8 Randy Schnepf
employees monitoring crop and market conditions in all of the major grain and
oilseed producing countries worldwide. However, there are three principal sources
of market information (described briefly below) that at least partially offset the
information advantage of the large multinational agri-corporations.
Agricultural Commodity Futures Markets

Commodity futures markets function as a central exchange for domestic and
international market information and as a primary mechanism for price
discovery. Because they reflect domestic and international market conditions, futures
contract price movements implicitly convey information about international supply
and demand conditions. This price-based market information function is
described in more detail below in the section “Commodity Futures Markets.”
U.S. Department of Agriculture (USDA)

USDA attempts to level the “information” playing field for market
participants by publishing timely U.S. and international crop supply, demand,
and price projections for major U.S. program crops, as well as for several
livestock production activities. USDA’s market information reporting process
is described in more detail below in the section “USDA Market Information.”
Private News Services

In addition to USDA’s commodity market information activities, a large
network of private sector, fee-based agricultural market news and information
services (including weather information services and commodity market
reporting services) have developed since the early 1970s to complement and
enhance USDA’s commodity reporting.
COMMODITY FUTURES MARKETS

Overview
A distinguishing feature of the U.S. and international commodity markets is the

importance of futures markets. Unlike cash markets which deal with the
immediate transfer of goods, a futures market is based on buying (or selling)
commodity contracts at a fixed price for potential physical delivery at some
future date.[8] Agricultural commodity futures contracts are traded on several
commodity exchanges in the United States and overseas (Appendix Tables 1 and
2).
Each exchange publishes information on the months for which futures contracts
are available, the contract size, deliverable grades, trading hours, contract period,
minimum price fluctuations, daily price limits, and margin information.[9] A
futures contract specifies the grade, quality, amount, and conditions for product
delivery (including acceptable delivery locations), as well as the delivery month.
In most cases, various product grades are deliverable in lieu of the contract’s base
grade or type, but subject to price premiums and/or discounts. The contract
specifications are written to ensure that they closely mirror cash market
conditions, and the months of trading are usually selected because of their
significance in the crop marketing year.[10]
A futures exchange provides the facilities for buyers and sellers to trade
commodity futures contracts openly, then reports any market transactions to the
public. Most futures exchanges publish daily information on the open, high, low, and
closing price of active futures contracts, as well as on their volume (reported as either
the number of contracts or the total of physical units such as bushels traded) and open
interest (the total number of futures contracts that have been entered into and not yet
liquidated by an offsetting transaction or fulfilled by delivery).[11]
As a result of this activity, futures markets function as a central exchange for
domestic and international market information and as a primary mechanism for price
discovery. The reliability of a futures market’s price discovery function is dependent
on the volume of daily transactions. Thinly traded markets, as indicated by low

volume, are more susceptible to price manipulation than are heavily traded ones. In
such situations, prices on the futures market may not accurately reflect either price
behavior in the cash market or expectations about the future.[12] It is not unusual for
distant contracts — that is, futures contracts whose delivery date is a year or more in
the future — to experience very low volume.
Publicly announced futures prices also play a critical role in facilitating seasonal
market operations because they provide a forum for forward contracting and
hedging.[13] Regional and local grain elevators rely on futures commodity exchanges
for hedging grain purchases and generally set their grain bid prices at a discount
to a nearby futures contract in areas of surplus production, (such as for corn in
the Corn Belt) or at a premium in deficit production areas (such as for corn in North
Carolina). As a result, cash prices and futures contract prices are strongly linked,
i.e., both prices contain much of the same information about market conditions.
Speculators — i.e., any person or entity that buys or sells futures contracts to
profit from anticipated commodity price changes in their favor — provide an
important function in futures markets by expanding both the trading volume and
liquidity of daily futures market transactions. Today speculators, including private
investment funds, comprise the majority of market participants. The presence of
10 Randy Schnepf
many speculative buyers and sellers tends to dampen extreme price volatility and
allows hedgers to buy and sell in large volume with ease.[14] As a result of
speculation and hedging, most futures contracts are settled without actual
delivery of the commodity.
The Price Basis
A key price relationship between the local cash price and the price for the
nearby futures contract is called the basis. The basis is defined as the difference
between the cash price of a particular commodity at a specific location and the nearby
futures contract (i.e., closest contract month) for that commodity. For example, the
basis for soft red wheat in Peoria, Illinois, on a given day in June would be the
difference between the cash price in Peoria and the July futures contract price at the
Chicago Board of Trade (CBOT) as quoted on that same day.
Under normal supply and demand conditions, the basis for a storable commodity
is negative reflecting the transportation cost associated with moving the commodity
from the local market to the delivery point specified by the futures contract, and the
carrying charges (storage, interest and insurance costs) associated with holding the
commodity during the time period separating the futures contract transaction date and
the delivery (or contract expiry) date. (See Figure 2.) As a futures contract expires
and the delivery month approaches, the carrying charges go to zero and the cash and
futures prices tend to converge. At the date of actual delivery, the basis represents
the pure transportation cost separating the local market from the futures market
delivery point.
In cases where local demand exceeds local supply, whether due to a crop
shortfall or a nearby processing plant, the basis may be less than the transport
margin or even exceed the futures market price. For example, local corn demand
may be bolstered by the existence of an ethanol plant or a major livestock feeding
operation. Geographic basis distributions demonstrate that local corn prices in the
southern plains states (with large cattle feeding operations) and eastern seaboard states
(with widespread dairy and poultry feeding operations) routinely exceed the price of
the nearby CBOT corn futures contract (i.e., an inverted basis) by as much as 10 to
20 cents per bushel due to strong local demand from livestock and poultry feeding
operations; whereas local corn prices in the primary corn growing regions of the
northern and western Corn Belt average 30 to 40 cents below CBOT corn futures
prices.[15]
Source: Commodity Trading Manual, ©Chicago Board of Trade, 1985, p. 65.
Figure 2. Basis Convergence.

Full carrying charges are rarely ever achieved in actual market behavior, except
in periods of substantial oversupply or excess stocks. However, the generally
repetitive patterns of the basis movements for storable agricultural commodities
make the basis more predictable from year to year than the movement of either cash
or futures prices.[16] As a result, the basis enables producers and users to estimate an
expected cash price from the currently reported value of a futures contract. This
predictability greatly reduces the risk of using the futures market to hedge or forward
contract.
Major Factors Influencing the Basis

Factors affecting the local basis for grains, oilseeds, and cotton are similar to
the factors affecting both cash and futures prices and include 1) the overall
supply and demand for each commodity by variety or type; 2) the supply and
demand of other commodities that compete for either the same land in production
or the same dollar of consumer expenditure; 3) geographical disparities in supply and
demand; 4) transportation and transportation problems; 5) transportation pricing
structure; 6) available storage space; 7) quality factors; and 8) market
expectations.[17]
12 Randy Schnepf
Inter-Contract Price Spreads
The price relationships that exist between differing futures contract

months for the same commodity are called inter-contract (or intra-market) price
spreads. Under normal supply and demand conditions, more deferred futures
contracts have a premium over nearby contracts that reflects the carrying charges
of holding the commodity until the deferred contract dates. For example,
suppose that the hypothetical cost of carrying a $4.00 bushel of wheat for one
month is 3 cents (calculated as: 6% annual interest charges for one month which
equals 2 cents; plus insurance and other fees of 1 cent per bushel per month).[18] Then the
premium (based strictly on carrying costs) between the September contract of the
current year and next year’s March contract would be 18 cents per bushel
(calculated as: six months at 3 cents per month per bushel, equal to 18 cents).
However, “normal” conditions rarely persist and the market is always altering
its expectations of future events as new market information becomes available. As
a result, price differences between futures contracts rarely equate to simple carrying
charges. During periods of supply shortage, cash prices tend to rise relative to futures
contract prices, and nearby futures contract prices tend to rise relative to more distant
contract months. As a result, both the basis and the price spreads between nearby and
deferred contracts will narrow. If a severe scarcity develops, the carrying charges
may disappear or actually become negative — a situation called an inverted market.

Scarcity causes high prices in the cash and nearby futures contracts because the
market gives priority to the present and discounts the future.
Old-Crop/New-Crop Price Spreads
While inverted markets resulting from severe scarcity are rare, a period of
normal inversion (i.e., cash or nearby futures contract prices above more distant
futures contract prices) frequently occurs between the last futures delivery month of
one crop year (when marketable supplies are at their lowest point) and the first
delivery month of the next crop year (when supplies are expected to be relatively
abundant due to the new harvest).[19] This type of inversion is often referred to as the
old-crop/new-crop inversion. For wheat, the old-crop/new-crop price spread is
represented by the price difference between the May and July futures contracts;
September and December contracts for corn; August and September contracts for
soybeans; and July and October contracts for cotton.
As an example of how these price spread relationships may vary, consider the
old-crop/new-crop price spreads at the three major U.S. wheat exchanges in the
spring of 2004. On March 1, 2004, the May (04)-July (04) price spread for Hard Red
Spring (HRS) wheat at the Minneapolis Grain Exchange settled at +4 cents per
bushel indicating a relatively tight supply situation for high-protein spring wheat. In
contrast, the May (04)-July (04) price spread for Hard Red Winter (HRW) wheat
settled at -2 cents at the Kansas City Board of Trade (KCBOT), and at -2.5 cents for
Soft Red Winter (SRW) wheat at the Chicago Board of Trade (CBOT). If carrying
charges were the sole determinant then the May-June price spread would be
about -5 to -6 cents per bushel. Instead, the KCBOT and CBOT old-crop/new-crop
prices spreads of -2 and -2.5 cents were less than the full carrying charges
for the two-month time period separating the May and July contracts suggesting
relatively tight supply conditions. However, the market conditions for HRW and SRW
wheat appeared to be significantly less tight than for HRS which had an inverted
basis of +4 cents. This example demonstrates how protein premiums plus differences in
oldcrop/new-crop supplies can cause market prices to vary across both time and
location. Local elevator price bids based off of futures market contracts can be
expected to follow a similar pattern of price differentials.
USDA MARKET INFORMATION

Introduction
USDA routinely releases a series of commodity market information reports to

the public including U.S. and international crop and livestock production and
commodity marketing activity for historical, current, and future time periods. USDA
reports are released on a predetermined and publically announced schedule.[20]
(See Appendix Table 3.) Commodity markets rely heavily on USDA reports
for guidance on supply and demand conditions. Most private sector market news
services design their own reports and activities around USDA data releases, and
market watchers routinely offer their own “guesstimates” in advance of major USDA
reports.
The crop estimates, projected supply and demand conditions, and farm price
projections contained in USDA reports are used as benchmarks in the marketplace
because of their comprehensive nature, objectivity, and timeliness. The release of
USDA supply and demand estimates has the potential to substantially alter market
expectations about current and future commodity market conditions and are,
therefore, closely watched by market participants. On occasion, when USDA
estimates represent a substantial deviation from market expectations concerning the
14 Randy Schnepf
supply and demand conditions for a particular commodity, significant price

movement occurs.
An annual calendar is prepared in December of each year showing the date and
hour of the coming year’s data releases. The reports are released electronically from
USDA headquarters in Washington, D.C. State statistical offices further facilitate
transmission of the reports through local news releases and reports.
USDA relies on a formal structure for assembling and disseminating market
information from across its various internal agencies.[21] The cornerstone of this
process is USDA’s National Agricultural Statistics Service (NASS) which collects
and publishes reports on an array of data on U.S. agricultural activities including crop
area, yield, production, and growing conditions; livestock, poultry, and dairy
production activities; input prices paid; farm prices received; and other agricultural
data covering most agricultural activities undertaken in the United States.[22]
Crop Production Reports
For grains, oilseeds, and cotton grown in the United States, NASS
publishes a number of reports which estimate the production of each
commodity based on data collected from farm operations and field observations
(see Appendix Table 4).[23] Monthly NASS Crop Production reports include
estimates (for the nation and by major producing state) of harvested acreage, yield,
and production. Crops included in each month’s Crop Production report vary based
on each crops seasonality of production.[24] Other crop-related NASS reports
are released in accordance with each crops production cycle as described below
and in Appendix Tables 3 and 4.
Estimates, Forecasts, and Projections

USDA’s crop reporting schedule encompasses forecasts made during the
growing season and estimates made after harvest. Forecasts and estimates
represent two distinct concepts. Estimates generally refer to an accomplished fact,
such as crop yields after the crop is harvested. In contrast, forecasts relate to an
expected future occurrence (but generally within the crop year as supporting data is
becoming available), such as crop yields expected prior to actual harvest of the
crop based on available information such as current growing condition,
measurements of fertilizer usage, etc. Projections are an extension of forecasts,
but made further into the future — e.g., for the next crop year (T+1) — where no
objective supporting information is available.[25] Instead, projections are based
on extending historical supply and demand relationships, trade and demand
patterns, and government policies into the future. Examples of projections

include USDA’s 10-year baseline projections which project commodity supply-and-use
balances starting in the year T+1 and extending for an additional nine years into the
future.
Crop Area
NASS conducts three major acreage surveys in any given year (T). The
prospective plantings survey in March provides early indications of what
farmers intend to plant; the midyear acreage survey, conducted in early June, is
used to estimate spring-planted acreages and acreages for harvest; and the end-
of-year acreage and production survey is conducted after most of the field crops have
been harvested.
Prospective Plantings
Field crop planted-acreage intentions are based primarily on a survey —
conducted during the first two weeks of March — of the current crop planting
intentions for about 55,000 randomly-selected farm operators from across the
United States. These estimates are published in the Prospective Plantings report
scheduled for release at the end of each March (in accordance with a pre-
announced schedule). The acreage estimates are intended to reflect grower planting
intentions as of the survey period and give the first indication of potential plantings for
the year. Actual plantings may vary from intentions in accordance with changes in
weather or market conditions.
Acreage
Mid-year estimates for planted acreage are made based on surveys conducted in
early June when field crop acreages have been established or planting
intentions are firm. These estimates are published in the Acreage report scheduled
for release at the end of each June. Winter wheat is an exception since seeding
generally occurs during September-November of the preceding calendar year (T-1).
The first forecast of winter wheat and rye planted area is released in January (T) in
the Winter Wheat and Rye Seedings report. Any changes in winter wheat planted
acreage estimates in the Prospective Plantings and Acreage reports are considered
revisions.
Mid-year estimates of harvested acreage are based on reported acres for harvest
for the earliest harvested crops, such as the small grains. The first forecast of the
harvested acreage of winter wheat is published in the May release of the Crop
Production report. The winter wheat planted and harvested acreage is subject to
16 Randy Schnepf
revisions in the June Acreage report. The first forecasts of harvested acreage for
spring wheat is published in the July Crop Production report.
For the crops harvested later in the year, such as corn and soybeans, initial
estimates make normal allowances for abandonment and acres used for other
purposes. Estimates of acreage for harvest are subject to monthly revision, although
they usually remain unchanged through the season. Current monthly acreage
indications are obtained from the objective yield measurement program for corn,
cotton, wheat, and soybeans and for other crops from special surveys conducted when
unusual weather or economic conditions could affect the acreage to be
harvested. For rice, cotton, oilseeds, and coarse grains, harvested acreage is first
forecast in the August Crop Production report.
Yield and Production Forecasts

The first forecasts of yield and production are published in the May Crop
Production report for fall-planted winter wheat (with monthly updates through
October); in July for barley, oats, rye, durum, and spring wheat; and in August for the
remaining field crops — corn, cotton, hay, oilseeds, peanuts, rice, sorghum, sugar cane,
and sugar beets — with monthly updates through November. Cotton yield estimates are
updated again in the December Crop Production.
Objective yield surveys are conducted during the principal growing season for
cotton, corn, rice, sorghum, soybeans, and wheat in each commodities’ major
producing states. A forecast of prospective yield or production on a given date
assumes that weather conditions and damage from insects, diseases, or other causes
will be about normal (or the same as the average of previous years) during the
remainder of the growing season. If any of these variables change, the final
estimate may differ significantly from the earlier forecast.
Growing Conditions
In addition to the monthly Crop Production reports, NASS also publishes a
weekly Crop Progress report during the principal growing season (April to
November) including growing condition indexes for the major crops as well as
pasture and forage conditions.[26] USDA, through its Joint Agricultural Weather
Facility (JAWF), also publishes weekly information on U.S. and international
weather in its Weekly Weather and Crop Bulletin.[27] These weekly reports on
crop progress and conditions, as well as weather, provide a basis for evaluating
crop yield prospects across the various global production zones for each
commodity. As a result, they are closely watched and reported on by other secondary
market information sources.
Year-End Estimates
Year-end estimates of acreage, yield, and production for barley, durum, oats,
rye, and wheat are published in the Small Grains Annual Summary, released at
the end of September (T). For all remaining field crops, yearend estimates of acreage,
yield, and production are published in the Crop Production Annual Summary report the
following January (T+1).
Market Demand Information
Demand for agricultural products originates from a broad range of sources

including the livestock sector, food and industrial processors, and foreign markets.
USDA informs agricultural markets about commodity demand conditions by
publishing various reports on domestic use, trade, stocks, and prices for major
agricultural commodities. The cornerstone of USDA market demand reports is the
monthly World Agricultural Supply and Demand Estimates (WASDE) report —
published by USDA’s World Agricultural Outlook Board (WAOB) in collaboration
with other USDA agencies.[28] The WASDE report is released simultaneously with the
Crop Production report each month in order to incorporate new NASS production
forecasts into the commodity supply and demand estimates. These estimates also
combine and synthesize U.S. and foreign market information and government
program information assembled by the various USDA agencies.
In the WASDE report, data are assembled into brief supply and demand
balances, complete with projections of the national average U.S. farm price received,
for each of the major U.S. program crops (feed grains — corn, barley, sorghum, and
oats; wheat by class; rice by grain length; soybeans and its products; sugar; and
cotton) for both the United States and the world with breakouts by major foreign
producer, consumer, or competitor as the case may be for each commodity. The
WASDE report is supplemented by monthly commodity situation and outlook reports
and annual data yearbooks for wheat, feed grains, rice, soybeans, and cotton —
published by USDA’s Economic Research Service (ERS) — which provide market
analysis and more detailed supply and demand tables for these same crops.[29]
Domestic Use
Based on the particular commodity being monitored, domestic use may be
broken into various sub-categories such as feed use, seed use, and food and
industrial use. Market information for this diversity of potential demand sources
is less survey-based and less systematic than the information provided by
USDA’s many crop-production related reports.
18 Randy Schnepf
Stocks
The Grain Stocks report — published quarterly in January, March, June, and
September by NASS is based on surveys of farmers and elevator operators.
The Grain Stocks report covers all wheat, durum wheat, corn, sorghum, oats, barley,
soybeans, flaxseed, canola, rapeseed, rye, sunflower, safflower, and mustard seed.
A separate Rice Stocks report is issued in January, March, August, and
October. These reports are closely watched by market observers as an important first
indicator of U.S. domestic demand. Although the stocks report is intended to
estimate the amount of grain stored on and off farms at different points during the
marketing year, quarterly usage may be approximated as the difference between
the current quarter’s stocks and the previous quarter’s stocks.
Feed Use
No survey of feed use is undertaken by USDA; however, several USDA reports
provide information about the potential for feed demand as well as the prices
and availability of substitute feeds. Three specific NASS reports — the monthly
Cattle on Feed report, the quarterly Hogs and Pigs report, and the monthly Poultry
Slaughter report — provide information about the location and sizes of animal
populations during certain periods of the year. These reports are
supplemented by the monthly Livestock, Dairy, and Poultry Outlook report published
by ERS that presents detailed economic analysis of the implications of NASS
livestock reports. The NASS Weekly Weather and Crop Bulletin, with its index on
the quality of pastures, provides an indication of grazing availability — an important
offset to feedlot use and feed demand.
Seed Use
Seed demand is directly related to plantings and will, therefore, move up
or down with changes in the projections for crop area planted. However, seed
use traditionally represents such a small portion of total disappearance that any
changes to expected seed demand rarely, in and of themselves, elicit a market
response. Both the WASDE report and ERS commodity outlook reports provide data
on seed use for various (but not all) crops.
Food and Industrial Use

Projections of food and industrial use tend to be fairly stable and, therefore,
more predictable than feed use or export demand. In most cases a simple trend
line is used to predict future food and industrial demand levels. This results, in
large part, because primary agricultural products usually represent only a very
small portion of the final cost of most processed products, whether it be a food
product such as a loaf of bread, a box of breakfast cereal, or a jar of baby food; or
an industrial product such as soap or paint. As a result, changes in this demand
category are rarely unexpected, and rarely produce unexpected market price
movements.
Basic data for industrial use comes from the Census Bureau’s survey of
manufacturing industries which is issued every five years. Industry reports such as
the Milling and Baking News provide information on demand for wheat and
other cereals by food processing sector. Similarly, specific agricultural
processor’s associations, such as the National Oilseed Processors Association
(NOPA), provide information on processing capacity and use. In recent years,
federal support for ethanol production has promoted industrial use of corn and
some sorghum.[30] However, this new demand is largely recognized by the
marketplace (with announcements of financing and construction of new
processing plants) well before it plays a role in boosting demand, thus mitigating
its short-term price impact.
Export Demand
Since the market events of 1972, most market observers consider exports
to be the great uncertainty underlying commodity supply, demand, and price
forecasts.[31] In 1972, the Soviet Union made unexpected purchases of large amounts of
U.S. grain. Prices for corn, wheat, and soybeans climbed to record-levels in
1973, then to still higher levels in 1974. Congress responded by mandating export
sales reporting by USDA beginning in 1973.[32]
Today, there are three primary data sources which monitor the U.S. trade
situation and underlie USDA projections of U.S. agricultural trade.
• The weekly Export Sales report published by USDA’s Foreign

Agricultural Service (FAS). The Export Sales report indicates the
amounts of major U.S. agricultural commodities that have been exported,
as well as outstanding sales which have been contracted for but not
delivered, during the current marketing year compared with the same period
from the previous marketing year.[33]
• The weekly Grains Inspected for Export report issued by USDA’s
Agricultural Marketing Service and based on inspections undertaken by the
Federal Grain Inspection Service of USDA’s Grain Inspection,
Packers, and Stockyards Administration.[34]
• The Census Bureau (Department of Commerce) which issues a monthly
export report that indicates not only grain exports, but also product exports
including soybean meal and oil, and wheat flour.[35] At the end of each
20 Randy Schnepf
commodity’s marketing year, the Census Bureau export data become the
official USDA export estimate.
The Census Bureau data are released with a nearly two-month lag; for
example, export data for the month of January is not released until mid-March.
As a result, both the Export Sales and the Grains Inspected for Export reports
are closely watched for clues about the likelihood of meeting current USDA
export forecasts — shortfalls or excesses reflect unexpected changes in commodity
supplies and their related price forecasts. Many market information services
routinely publish their own forecasts of weekly grain sales and inspections
ahead of the release of the official reports. Market prices have been known to react
to significant differences between the average of expected weekly exports by private
forecasters and the actual weekly export announced in the official USDA reports.
In addition to monitoring U.S. agricultural trade, FAS routinely monitors and
reports on international commodity market conditions through an international
network of agricultural attaches. Although their data are not considered official, FAS
attache reports — which provide detailed country- and commodity-specific market
information for major foreign countries — are regularly published and made
available to the public.[36] In addition, FAS’s Production Estimates and Crop
Assessment Division (PECAD) provides regular reports on foreign and world crop
area, yield, and production estimates.[37] Various commodity divisions within

FAS also produce monthly circulars on international market conditions for
grains, oilseeds, cotton, and other commodities.[38]
U.S. Government Program Activity
In addition to crop production and marketing demand information, government

program activity can have a significant influence on market prices. Several USDA
agencies monitor and report on market-relevant government program activity.
USDA’s Farm Service Agency (FSA) provides information on government price and
income supports, government stock-holding activity, and participation in the
Conservation Reserve Program.[39] The Risk Management Agency (RMA) of USDA
oversees and reports on the implementation of government-subsidized crop
insurance.[40]
The various crop-specific subsidies and price and income supports provided
under these government programs play an important role in producer planting
decisions by altering the relative profitability of different crops in different regions.
The Conservation Reserve Program also has an important effect on agricultural
production because it removes large tracts of cultivable land from production for
extended periods of time.[41] USDA’s FAS monitors and reports on U.S. food aid
programs, as well as on government programs that promote or assist U.S. agricultural
exports.[42] Government-assisted exports draw from U.S. agricultural supplies and
tend to support market prices. An unexpectedly large shift in program exports can
alter market expectations and prices.
Market Price Information
USDA projects the season-average farm price (SAFP) for all major program
crops contained in the WASDE report except for cotton.[43] The SAFP projection is
usually presented as a range of high and low values that is tightened with each
succeeding month until a single point estimate is reported near the end of each
commodity’s marketing year. Market observers and the various private market
information services tend to use the mid-point of the USDA projected SAFP range
as a reference point from which all comparisons are made (such as “too high” or “too
low”).
In support of the SAFP estimates reported in the WASDE report, NASS releases
a monthly Agricultural Prices report that contains monthly and marketing year
average prices received (weighted by the monthly share of annual marketings) for
most major crops at both the national and state level for major producing states.
USDA’s Agricultural Marketing Service (AMS) provides a portal to price and
market information for a range of agricultural commodities.[44] The Livestock and
Grain Market News Branch of AMS monitors and reports on: cash, barge, rail, and
truck bids for grains and oilseeds at major terminal and export markets, including
barge loading positions on the Mississippi, Ohio, and Illinois Rivers and at Central
Illinois (Decatur) corn and soybean processing location; nearby futures contract
prices and cash-to-futures basis; and recent export sales by grain type with details on
tonnage and delivery dates in the Daily Grain Review, Export Grain Bids, Daily
National Grain Market Summary and Weekly National Grain Market Summary
reports.[45]
Ending Stocks as a Summary of Market Conditions
USDA projects season-ending stocks for all major program crops contained in the
monthly WASDE report. Ending stocks are calculated as the difference between total
supplies (beginning stocks plus production plus imports) and total disappearance (all
22 Randy Schnepf
domestic uses plus exports). As such, season-ending stocks of an annually produced

commodity summarize the effects of both supply and demand factors during the
marketing year.
In the early months of the marketing year, when most components of the supply
and demand balance sheet are being forecast rather than estimated, expected ending
stocks — expressed as a ratio over expected total use — are frequently used as an
indicator of a commodity’s expected price outcome by USDA and other market
observers.[46] For most seasonal commodities, annual prices tend to have a strong
negative correlation with their ending stocks-to-use ratio. (See Figure 2 for an
example.) As a result, expectations for high stocks relative to use typically result in
lower prices, while expectations for low stocks relative to use tend to raise prices.
Figure 3. Season-Average Farm Price Received for All Wheat vs. End-of-Year
Stocks-to-Use Ratio.
A certain amount of stocks at the end of the marketing year are necessary
to provide a continuous flow of grain to processors and exporters before the new
crop is harvested. These stocks are referred to as pipeline supplies. Although there
is no hard and fast rule on what volume of stocks represents pipeline levels for the
major grain and oilseed crops, whenever stocks approach historically low
levels market analysts speculate about what pipeline-stock levels might be. For
wheat, pipeline stocks are thought to be in a range of 350 to 400 million bushels; for
corn, 400 to 500 million bushels; and for soybeans, about 150 to 200 million
bushels. Whenever USDA ending stock projections approach these levels, market
prices become very sensitive to unexpected market news and prices tend to be more
volatile than during periods of abundant stocks.
OVERVIEW OF COMMODITY MARKETS

Macroeconomic Linkages to Commodity Markets
Long-run commodity demand is driven, in large part, by population and

income dynamics. A country’s demographic make-up by age and ethnicity may
play a large role in determining food needs and preferences. However, demographic
changes generally occur slowly and in accordance with well-know behavioral
patterns. Similarly, per-capita income growth usually trends upward or downward
gradually and predictably with the national economy. As a result, short-term price
movements are rarely driven by either of these phenomena. However, an important
exception is the 1997 Asian financial crisis which dramatically and quite suddenly
curtailed commodity import demand in several major agricultural importing
countries of East and Southeast Asia.[47] The 1997 Asian crisis contributed
significantly to the price declines in most international commodity markets of the
late 1 990s.
Changes in currency exchange rates between trading nations can occur more
suddenly and can have significant effects on international trade and prices. For an
exporting country, a devaluation of its currency against other exporting countries has
the same effect as a lowering of its export price against those competitor nations,
thereby making its product more competitive. In contrast, for an importing
country, a devaluation of its currency against the currency of exporting nations will
make products from those exporters more expensive, thereby lowering its import
demand. Currency appreciation will have the opposite effect. Currency
exchange rate fluctuations and their economic implications are not unique to
agricultural commodities, but affect all goods and services traded between
nations.[48]
Special Considerations for Agricultural Markets
In general, agricultural commodity prices respond rapidly to actual and

anticipated changes in supply and demand conditions. However, certain
characteristics of agricultural product markets set them apart from most non-
24 Randy Schnepf
agricultural products and tend to make agricultural product prices more volatile than
are the prices of most nonfarm goods and services.[49] Three such
noteworthy characteristics of agricultural crops include the seasonality of
production, the derived nature of their demand, and generally price-inelastic
demand and supply functions.
Seasonality
Most agricultural crops grown in temperate-zone countries like the United
States where freezing winters limit crop production to a 6- to 9-month period (the
growing period is shorter at higher latitudes) have strong seasonal production
patterns. As a result, the biological nature of crop production plays an
important role in agricultural product price behavior.
In particular, the production of spring-planted crops has a lag in its response to
market signals. Producers must make their planting decisions by early spring in order
to purchase the seed and other inputs needed for production. However, producers do
not receive a price for their production until after the harvest when ownership of the
physical commodity is transferred.[50] As a result, growers’ planting decisions are
based partly on their expectations about future yields, prices (of both outputs and the
inputs needed to produce those outputs), and government program support rates for
alternative production activities. Also, expectations concerning international market
conditions and the possibility for unexpected changes in the trade outlook are often
relevant for most major U.S. field crops.
A region’s agronomic conditions, such as weather and soil types, may influence
the viability of producing a particular crop or undertaking a livestock activity;
however, expectations of market conditions such as harvest-time output prices
influence the final choices. As a result, changes in the expected supply and demand
of crops or other activities that compete for land, or of other food sources that
compete for demand can ripple through the various agricultural markets, thus altering
prices. Furthermore, since the end result of a planting-time production
decision does not materialize until several months later at harvest time, it is possible
that market conditions will have changed substantially or that a producer’s actual
production may be very different from the planned production due to unexpected
variations in weather, pests, diseases, or other circumstances.
Derived Nature of Many Agricultural Product Prices

Demand for agricultural products originates with consumers who use the
various food and industrial products that are produced from “raw” or unprocessed
farm commodities such as grains, oilseeds, and fiber. At the consumer level, such
final demand is referred to as primary demand. The term “derived demand” refers
to demand for inputs that are used to produce the final products.[51] For example,
corn and other feedstuffs are important inputs in the livestock industry; wheat is
used to make various bakery products; and cotton is used in the production of
textiles. Thus, the demand for corn, wheat, and cotton is derived from the demand
for their various end products. Similarly, the demand for soybeans is derived
from the demand for soybean meal and soybean oil — the major products
obtained from crushing soybeans.
A diner at a restaurant may be seeking a particular flavor or texture in her steak
which resonates back through the supply chain to the feeding decisions made at the
ranch or feedlot where cattle are fattened and readied for market. As a result, the
potential buyers of raw agricultural commodities are generally seeking a particular
end-use characteristic. For example, a livestock feeder is generally trying to obtain
the least-cost set of feed ingredients that yield a particular balance of protein, energy,
fiber, and other nutrient components. A baker or miller might be looking for
particular baking or milling qualities in their wheat purchases.
It is possible for the overall supply of a generic commodity to be in abundant
supply, while a specific variety of that commodity possessing the desired end-use
traits may be in short supply. As a result, substantial price premiums and discounts
may develop based on the commodities’ end-use characteristics. This occurs
frequently in the wheat market where the different wheat varieties have very unique
baking and milling characteristics. But it is also not uncommon in other grain and
oilseed markets, e.g., rice (based on grain length), corn (based on color, and oil or
starch content), soybean (based on protein or oil content), barley (based on malting
quality), etc.
Price-Inelastic Demand and Supply

In general, the demand and supply of farm products, particularly basic
grains and oilseeds, are relatively price-inelastic (i.e., quantities demanded and
supplied change proportionally less than prices). This implies that even small
changes in supply can result in large price movements. As a result, unexpected
market news can produce potentially large swings in farm prices and incomes. This
price dynamic has long been a characteristic of the agricultural sector and a farm
policy concern.
The supply elasticity of an agricultural commodity reflects the speed with which
new supplies become available (or supplies available in the marketplace decline) in
response to a price rise (fall) in a particular market. Since most grains are limited to
a single annual harvest, new supply flows to market in response to a post-harvest
price change must come from either domestic stocks or international sources.
As a result, short-term supply response to a price rise can be very limited during
26 Randy Schnepf
periods of low stock holdings, but in the longer run expanded acreage and
more intensive cultivation practices can work to increase supplies.
On the other hand, when prices fall producers might be inclined to withhold
their commodity from the market. The cost of storage, the length of time before any
expected price rebound, the anticipated strength of a price rebound, and a producer’s
current cash-flow situation combine to determine if storage is a viable
alternative. If a return to higher prices is not expected in the near future, storage
may not be viable and continued marketings may add to downward price pressure.
Similarly, demand elasticity reflects a consumer’s ability and/or
willingness to alter consumption when prices for the desired commodity rises or falls.
Consumers consider both own-price and cross-price movements of complementary
and substitute products in making their expenditure decisions. Willingness to
substitute another commodity when prices rise depends on several factors, including
the number and availability of substitutes, the importance of the commodity as
measured by its share of consumers’ budgetary expenditures, and the strength of
consumers’ tastes and preferences. Since the farm cost of basic grains generally
amounts to a very small share of the retail cost of consumer food products,
changes in grain prices generally have little impact on retail food prices and
therefore little impact on consumer behavior and corresponding farm-level demand.
For example, grain is estimated to account for only a 5% share of the retail price of a
one-pound loaf of bread.[52] A 20% rise in wheat prices would translate into only
about a 1% rise in the price of a loaf of bread. Few consumers would notice a 2-cent
increase in the price of a $2 loaf of bread.
Figure 4. Price Changes Due to a Supply Shift Are Larger than Quantity Changes under
Inelastic Demand Curves.
Figure 4 displays examples of both inelastic and elastic supply and

demand curves. The diagram on the left-hand side of Figure 4 shows fairly
price- unresponsive (i.e., inelastic) demand and supply curves — typical of those
associated with most seasonal agricultural markets. A sudden outward shift (i.e.,
expansion) in demand from D1 to D2 moves the market equilibrium outward along the
supply curve S. This change in market equilibrium results in only a modest
percentage change in the quantity supplied to the market, ∆Q/Q, compared with a
much larger percentage increase in prices, ∆P/P. A similar large price change is
obtained from a sudden shortfall in supplies represented by a leftward movement
of the supply curve. In contrast, greater than expected supply (represented by a
rightward shift of the supply curve S) would lead to a large drop in the market price
(ignoring the effects of government programs).
The diagram on the right-hand side of Figure 4 displays more responsive (i.e.,
more elastic) demand and supply curves — typical of those associated with many
higher-valued, non-agricultural markets. For comparative purposes, assume the same
sudden outward shift in demand from D1 to D2 moves the market equilibrium
outward along the supply curve S. Here, however, the change in market equilibrium
results in a much larger percentage change in the quantity supplied to the
market, ∆Q/Q, compared with a smaller percentage increase in prices, ∆P/P.
Increasing demand for grains and oilseeds by the industrial processing sector,
whether from food or biofuels processing industries or from expanding industrial hog
and poultry operations, further reinforces the general price inelasticity of demand for
many agricultural commodities. Industrial use of grains is generally less sensitive to
price change since, as with retail food prices, the price of the agricultural commodity
usually represents only a small share of overall production costs of the finished
product. Furthermore, industrial users have generally made tremendous
investments in plant equipment and machinery, and must continue to operate at
some minimal level of capacity year-round as a return on that investment.
In contrast, feed demand for grain and protein meals, particularly for cattle
feeding in the Southern and Central Plains States, is far more sensitive to relative
feed grain prices, since similar feed energy values may be obtained from a variety of
grains. Cattle feeders in these regions have considerable leeway to vary the shares
of different grains in their feed rations as relative prices change.
In general, inelastic demand and supply responsiveness characterizes most
agricultural products. However, distinct differences in the level and pattern of
responsiveness do exist across commodities. Some of these differences are briefly
introduced below.
28 Randy Schnepf
Wheat
Background
Wheat is grown in almost every temperate-zone country of North America,
Europe, Asia, and South America. The largest wheat producing countries are
China, India, the United States, Russia, Canada, and Australia. U.S. wheat
production accounts for about 9-10% of world production; but the United States is
the world’s leading wheat exporter with roughly a 25% share of annual world
trade. However, the international wheat market is very competitive and foreign
sales often hinge on wheat variety and product characteristics as well as price.
The U.S. marketing year for wheat runs from June 1 to May 31.[53] U.S. wheat
is produced as both a winter and a spring crop. Winter wheat is usually seeded in
September or October of the preceding year. The United States produces all six of
the world’s major wheat classes — hard red winter (HRW), hard red spring (HRS),
soft red winter (SRW), hard white, soft white, and durum. Hard wheats generally
contain higher protein levels — a desirable trait for bread making, while softer
wheats may be preferable for making noodles, crackers, and pastries. Durum wheat
is ground into a coarse flour called semolina that is used for making pastas. In local
markets, the demand for a particular wheat class (and quality) relative to its nearby
supply will determine local prices. However, linkages to national and global markets
bring a variety of additional factors — such as transportation costs,

competitors supplies, and foreign demand — into play in determining the
price of a particular wheat type and quality.
Wheat is the principal food grain grown in the United States; however, a
substantial portion (8%-10%) of the annual U.S. wheat crop is used as a feed grain.
As a result, wheat must compete with other cereals for a place at the
consumer’s dinner table, while also vying with coarse grains and other feedstuffs
in livestock feed markets. Almost half of the U.S. wheat crop is exported annually,
although the importance of exports varies by class of wheat. White wheat and
HRS wheat rely more than other wheat classes on sales into export markets. The
larger the share of exports to production, the greater the vulnerability to
international market forces.
In the U.S. domestic market, flour millers are the major users of wheat,
accounting for over 70% of primary domestic wheat processing in 2000 and
2001.[54] In most cases, a wheat buyer at a flour mill will “source” wheat by
general location and primary quality attributes such as protein quantity and quality
(i.e., gluten share), and baking performance. Price premiums and/or discounts
reflecting quality differences often develop and can also influence buyer
preferences. Other major wheat processors include breakfast food, pet food,
and feed manufacturers. Wheat may be used directly in feed rations when alternate
feedstuffs are lacking or when production-related quality damage makes the wheat
unmarketable as a food. Wheat milling by-products such as bran, shorts, and
middlings are also used by feed manufacturers in the production of animal
feeds.[55]
Key Market Factors

Several factors that are somewhat unique to the wheat market suggest that
the U.S. wheat market structure has greater supply and demand elasticity than
most other field crops. In other words, wheat supply and demand appear to
respond faster than the supply and demand of other grains when confronted with some
external shocks such as a crop failure in a competing exporter country or a
financial crisis in a major purchasing country. Thus, wheat prices are generally
subject to less dramatic price swings than most other grains.[56]
These characteristics include the confluence of food and feed markets; seasonal
differences between U.S. winter and spring production; seasonal differences between
northern and southern hemisphere crops; a large number of foreign export
competitors, and U.S. government food aid programs which rely heavily on wheat.
First, the feed potential of wheat can dampen wheat price variability, either
preventing prices from falling too low by introducing an additional source of demand
or by shutting off that same demand source when prices rise too high relative to other
feed grains. For example, if wheat prices fall too low, wheat begins to
compete with traditional feed grains (e.g., barley, sorghum, oats, and corn),
particularly in the Southern and Northern Plains States where local feed grain
production is frequently insufficient. On the other hand, as wheat prices rise
above a certain threshold in relation to feed grains, livestock feeders are quick to
reduce the share of wheat in their feed rations thus removing demand pressure
underlying the wheat price rise.
Second, U.S. wheat production is marked by two independent seasons, winter
and spring, with planting periods nearly six months apart. If it is apparent that winter
wheat acreage is substantially below market expectations due to prevented plantings
or that expected yields have suffered due to unusual winter weather during the
October-March period, some of the potential production losses can be offset by
increased spring wheat plantings. Given the correct price signals relative to other
crops, spring wheat can crowd out other spring-planted crops that compete for the
same acreage (e.g., barley, sorghum, sunflowers, soybeans, or corn). Or fallow
acreage — rotated out of production to rebuild soil moisture — can be prematurely
brought back into production in the spring provided prices are attractive.
30 Randy Schnepf
Third, two of the U.S.’s major wheat export competitors — Australia and
Argentina — are in the southern hemisphere where their production runs on a cycle
that is offset by about six months from the U.S. cycle. As a result, Argentina and
Australia have the opportunity to expand planted wheat acreage in response to supply
and demand circumstances in the United States within the same marketing year,
dampening the potential year-to-year variability of prices in the U.S. and international
market. While this potential additional supply limits price rises, it may deepen price
declines because high storage costs and limited storage capacity in those countries
frequently push their surplus production into international markets even when prices
are low.
Fourth, the potential for surplus production to enter agricultural markets from
several competing wheat exporter nations (principally Canada, Argentina,
Australia, the EU, and the Black Sea region) increases the supply responsiveness
of wheat beyond that of other major grains. For example, U.S. corn generally
faces direct export competition from only two countries, Argentina and China.
Fifth, most government export programs have been directed at wheat and
have dampened price variability in much the same manner as feed demand —
they introduce an additional source of demand that offsets price declines.
Because export programs are funded to deliver a fixed value of commodities, the
volume of U.S. program grain exports rises during periods of excess supply and
lower prices, but falls when supplies are tighter and prices higher.
In summary, the price sensitivity of wheat feeding and government export
programs, coupled with the opportunity for U.S. spring wheat growers and
southern hemisphere producers to respond to northern hemisphere winter wheat
conditions, provides an important stabilizing effect on U.S. wheat market
prices in the face of variable world demand.
Corn
Background
Like wheat, corn is grown in almost every temperate-zone country of North
America, Europe, Asia, and South America. However, global corn production is less
well distributed than wheat, and only a few countries tend to dominate
production and trade in corn. Three countries — the United States, China, and Brazil
— account for two-thirds of world production. The United States is the dominant
corn exporter with a two-thirds share of world markets. China and Argentina
account for another 20% share of world trade. The Ukraine, Brazil, and the
Republic of South Africa are inconsistent exporters, but have shown an
increasing trend since 2000. This small pool of potential exporters can make
international corn prices vulnerable to a weather disruption in one of the major
exporter countries.
The U.S. marketing year for corn runs from September 1 to August 31.[57]
Corn is the most widely produced feed grain in the United States, accounting for more
than 90% of total value and production of feed grains. Other U.S. feed grains
include grain sorghum, barley, and oats. Around 80 million acres of land are
planted every year to corn, making it the single largest crop grown in United States.
A majority of the U.S. corn crop is grown in the traditional Corn Belt region
encompassing a swath of states running from Ohio westward through Indiana,
Illinois, Iowa, southern Minnesota, northern Missouri and into the eastern
Dakotas and Nebraska.
Since 2000, about 58% (on average) of the U.S. corn crop has been fed to
livestock as a primary energy source. Another 24% has been processed into a
multitude of food and industrial products including starch, sweeteners, corn
oil, beverage and industrial alcohol, and fuel ethanol. Finally, about 18% of U.S. corn
production has been exported into international markets.
Key Market Factors

As a feed grain, corn must compete with a broad range of feedstuffs
including other coarse grains, as well as feed wheat and in some cases low-
priced protein meals. This makes feed grain markets particularly sensitive to
relative prices among the various feed components. In the United States, the other
two major feed grains — feed barley and grain sorghum — have roughly 95% of the
feed value of corn.[58] As a result, they are often priced against corn futures on the
basis of their relative feed value.
Because most U.S. corn exports are destined to be used for livestock feed,
U.S. corn exports are particularly vulnerable to the availability of alternate feed
sources. For example, an early harvest freeze in late August in the Canadian
prairies has been known to convert a significant portion of Canada’s high-value,
high-protein wheat crop into low-priced feed grain in a single night. As such,
Canadian feed wheat traditionally has been very competitive in East Asian
markets, particularly South Korea, at the expense of U.S. corn exports. However,
the extent to which corn is crowded out of certain feed markets depends on the
feeding operation involved. Some livestock species, e.g., feeder cattle or dairy,
are better able to adjust to feed rations than others, e.g., swine or poultry which
are more corn-dependent.
A factor of growing importance in U.S. corn markets is the increasing use of
corn for ethanol production. This growth has been supported by several national and
32 Randy Schnepf
state programs.[59] An increase in the share of total demand attributed to industrial use
could lead to greater price variability in the face of weather-driven supply shortfalls.
In the 2005-2006 marketing year, USDA projects that 15% of U.S. corn production
(or about 1,575 million bushels) will be used for ethanol production. This
compares with a 4% share in 1990/1991 and a 6% share in 2000/01. Continued growth
in corn- based ethanol production without concomitant growth in corn production
will tend to support prices and possibly squeeze U.S. corn out of price-sensitive
feed and export markets.[60]
Rice
Background
Rice is the most important food staple for much of the world’s population,
particularly in Asia and parts of Africa and the Middle East. Rice is produced
and consumed throughout the world in climates that range from temperate to
tropical. However, Asian rice production accounts for nearly 90% of global rice
production with two countries — China and India — accounting for over half.
U.S. rice production generally accounts for a very small share (less than 2%) of
world production. However, the United States exports nearly half of its annual
production. As a result, the United States is among the world’s leading rice
exporting nations, traditionally behind Thailand and Vietnam. India, Pakistan,
China, and Egypt are also important rice exporting nations.
In the United States, the marketing year for rice runs from August 1 to July 31.[61]
Domestic production generally uses slightly more than half of the U.S. crop
every year. U.S. rice use falls into three major categories: table rice used
directly as food; rice processed into other types of consumables such as snacks or
ready-to-eat meals; and rice used in the brewing industry.
Key Market Factors

Only a small share, estimated at about 6%, of global rice production enters
world markets. As a result, the very limited amount of rice entering world
markets (24-2 8 million metric tons annually) relative to the large level of annual
world consumption (roughly 415 million metric tons) makes the
international rice market fairly sensitive to an unexpected production shortfall
in one of the major exporting or consuming countries, particularly if the lost
production must be made up by importing rice from the international marketplace.
In world markets there are two principal types of rice — long grain (indica) and
short grain (japonica) — each with very specific cooking qualities and appearance.
Consumers tend to have strict preferences for one or the other and rarely switch.
As a result, it is not uncommon for overall world rice supplies to be in surplus while
supplies of one or the other type of rice may be in short supply relative to
market demand. The United States produces and exports both indica and japonica
types of rice.
Rice processing further differentiates rice products and markets. Rice quality
is often associated with the degree of polishing (removing the hull and bran layers)
or whiteness of the grain and the percentage of whole versus broken grains. Both of
these attributes are highly dependent on milling infrastructure — a market feature
that the U.S. rice industry has used to its advantage to compete in international
markets. Parboiling rice (a process of steeping, then precooking rough rice under
pressure with its bran hull rice, then removing the hull through abrasion) results
in a product that is preferred by certain markets (e.g., Saudi Arabia, the Republic
of South Africa, and Nigeria).
Cotton
Background
Cotton is the single most important textile fiber in the world, accounting for
over 40% of total world fiber production.[62] While some 80 countries from around
the globe produce cotton, the United States, China, and India together provide
over half the world’s cotton. About one-third of annual world production is
traded in international markets. The United States, while ranking second to
China in production, is the leading exporter, accounting for over one-third of
global trade in raw cotton.
The U.S. marketing year for cotton runs from August 1 to July 31. The U.S.
textile industry has been in decline for the past decade. As a result, domestic use of
cotton has represented a declining share of annual production and the U.S. cotton
sector has increasingly turned to international markets to sell its output. Since
2002/2003, slightly more than 60% of the U.S. crop has been exported.
Key Market Factors

Cotton competes with several other fibers in U.S. and international textile
markets. Cotton’s principal competitor is polyester, but rayon, wool, jute, flax,
and silk are also used in the production of yarn for fabric. As a result, local and
international market conditions for these substitutes play a role in U.S. and
international cotton price formation.
34 Randy Schnepf
The phaseout of the Multifiber Arrangement (MFA) and other forces have been
reshaping world textile and cotton markets in recent years.[63] The MFA and its
predecessor agreements — through their set of trade rules and import quotas —
directly influenced world textile and clothing trade patterns (and indirectly influenced
world cotton markets) for nearly 50 years. These agreements protected U.S. and
European Union (EU) textile and clothing producers from imports, but raised prices
and reduced consumption in both U.S. and EU markets.
The elimination of the MFA (concluded on December 31, 2004) is helping
reduce clothing prices in the United States and the EU and causing a shift in
industrial demand for cotton to China, India, and Pakistan. At the same time, world
cotton consumption has accelerated along with economic growth since 1999,
especially in developing Asia, where an emerging consumer society is driving
increases in household consumption of clothing and other cotton products. In the
long run, income growth and technical change are expected to have a greater effect
on world cotton consumption than the elimination of the MFA.
Government programs such as Step-2 payments for domestic users and exports,
have also played an important role in facilitating both domestic consumption
and exports of U.S. cotton.[64] However, following a widely publicized ruling
in 2004 (upheld on appeal in 2005) against certain features of the U.S. cotton
program in a dispute settlement case brought by Brazil at the World Trade
Organization (WTO), U.S. government cotton programs are likely to be altered with
important potential market consequences.[65] The Administration has already
announced changes to the U.S. export credit guarantee program designed to
accommodate the WTO ruling, and the U.S. Congress has proposed eliminating
the Step-2 user payments in legislation that has passed both chambers (H.R.
4241, S. 1932). Conference action is pending. The effects of altering U.S.
export credit guarantees and the elimination of Step-2 user payments (if enacted) are
likely to reduce U.S. cotton exports and, by softening demand, put downward pressure
on domestic market prices.
In addition to the WTO case, intense international pressure has been brought to
bear upon cotton subsidies in general and U.S. cotton subsidies in particular at the
on-going Doha Round of WTO trade negotiations. It remains to be seen if these
pressures will elicit further changes to the U.S. cotton program. The market effect
of further reductions in U.S. cotton program support would depend on the specific
nature of the changes and how they would be implemented.
The Oilseed Complex
Background
The demand for oilseeds is derived primarily from the demand for edible oils
and protein meals. The international oilseed market consists of a large variety
of oil-bearing crops produced throughout the world including temperate-zone crops
such as canola, rapeseed, and sunflowerseed; tropical-zone crops such as palm kernel
and coconut copra; and multi-zone crops such as soybeans, cottonseed, and peanuts.
Most of these crops, when crushed for their oil, also yield high-protein meals that
are widely used in livestock and poultry rations. As a result, most of them are
relatively close substitutes and their prices are strongly correlated.
Processed soybeans are the largest source of protein feed and vegetable oil in
the world. Unlike many other commodity markets, only a few countries tend to
dominate soybean production and trade, making the market sensitive to any supply
disruption in one of the major producing nations. Major soybean producers include
the United States, Brazil, China, and Argentina which combined have accounted for
nearly 90% of global production since 2000. Three countries — United States,
Brazil, and Argentina — dominate world soybean trade, accounting for about 92%
of soybean exports since 2000; while two countries, the EU and China, have
accounted for nearly two-thirds of world imports.
The U.S. marketing year begins on September 1 for soybeans and on

October 1 for soybean meal and soybean oil.[66] Soybeans equal about 90% of U.S.
total oilseed production, while other oilseeds — such as cottonseed, sunflowerseed,
rapeseed, canola, and peanuts — account for the remainder. The United States
is the world’s leading soybean producer and exporter. Soybean and soybean
product exports accounted for 43% of U.S. soybean production in 2003. In the
United States, soybean oil accounts for about two-thirds of all the vegetable oils and
animal fats consumed. Similarly, soybean meal is the dominant protein meal
consumed in the United States. U.S. vegetable oil exports are heavily
influenced by concessional food aid to developing nations through such programs
as P.L. 480.[67]
Soybean meal is the world’s most important protein feed, accounting for nearly
65% of world supplies. Livestock feeds account for 98% of soybean meal
consumption. Similarly, soybean oil is the world’s largest source of vegetable oil.
An important market development of the past decade has been the phenomenal
growth of soybean output and exports by Brazil and Argentina. Together they
currently account for about half of the world soybean export market, up from less
than 15% before 1980; they have each surpassed the United States in soybean meal
and soybean oil exports. Vast untapped reserves of farmland in Brazil’s interior
36 Randy Schnepf
region could permit a continued significant expansion in soybean area, production,

and exports.
The tropically-produced palm oil accounts for an important and growing share
of global vegetable oil production (USDA projects a 30% share in 2005) and
vegetable oil trade (a projected 58% share in 2005). Malaysia and Indonesia are the
world’s leading palm oil producers and exporters. Indonesia still possesses
substantial untapped territory for further expansion of palm oil plantations. The rapid
growth in Southeast Asian palm-oil output means it will likely surpass soybean oil’s
top ranking within a few years.
Key Market Factors

Because of their primary processed products — protein meal and
vegetable oil — oilseeds are affected by market conditions in both the feed-
grain and edible oil sectors of U.S. and international markets. Foreign import
demand for whole oilseeds depends on the deficit between a countries’ domestic
oilseed output and its consumption. Divergent requirements for protein meal and
vegetable oil, as well as limits on domestic processing capacity, determine the ratio
of oilseeds to oilseed products that a country will import.
Some oilseeds have higher oil content than others; and some oilseeds yield a
higher protein content meal with less fiber, making them more easily
digestible. For example, a unit of soybean when crushed will yield, on the average,
about 18%-1 9% oil and 74%-80% meal with about 44% protein content. Soybean
meal is the most valuable component obtained from processing the soybean, ranging
from 50%-75% of its value (depending on relative prices of soybean oil and meal).
As a result, an importer must weight the relative prices for vegetable oils and protein
meals against the oil and meal yields for each type of oilseed, as well as the
protein and fiber content of the resultant meal. Another consideration is fiber
content. High-fiber meals are better suited for ruminants (e.g., feeder cattle and
dairy) than for non- ruminants (e.g., swine and poultry).
For soybean crushers, the processing decision involves choosing when to
commit to buying soybeans (e.g., from farmers), to processing them, and to selling
soybean meal and oil (e.g., to food and feed manufacturers). The main decision
variable in making binding commitments on future dates to sellers and buyers is the
gross soybean processing margin. This margin equals the per-bushel revenue of
soybeans processed into oil and meal minus the per-bushel soybean price. If the
gross soybean-processing margin is high enough, a processor will commit
soybean- processing resources for that date. If it is too low, the processor keeps the
processing resources available for a future date and a higher margin.
Compared with trade in other agricultural commodities, trade in whole oilseeds,

particularly soybeans, is relatively unrestricted by tariffs and other border measures.
But oilseed meals, and particularly vegetable oils, typically have higher tariffs.
Successful completion of the on-going Doha Round of multilateral trade
negotiations could reduce import tariffs and quantitative restrictions to global
oilseed product markets offering increased growth in demand.
An important demand-side market development has been the rapid growth of
China’s and India’s economies which has spurred their domestic food consumption.
China is now the world’s leading soybean importer, and both China and India are
among the world’s largest vegetable oil importers. The EU is self-sufficient in
vegetable oil production, but its protein deficit still makes it the world’s largest
importer of soybean meal and second-largest importer of soybeans. Changes in
agricultural and trade policies for all three of these countries have greatly influenced
world oilseed markets.
APPENDIX TABLES
Table 1. Major Agricultural Commodity Futures Exchanges
Futures Exchange Abbreviation Internet address

Minneapolis Grain MGE [http://www.mgex.com]
Exchange
Chicago Board of Trade CBOT [http://www.cbot.com]
Kansas City Board of Trade KCBOT [http://www.kcbot.com]
New York Cotton NYCE [http://www.nyce.com]
Exchange
Winnepeg Grain Exchange WCE [http://www.wce.ca]
Buenos Aires Cereals BOLSA [http://www.bolsadecereales.com]
Exchange
Rosario Futures Exchange ROFEX [http://www.rofex.com.ar]
European Union Euronext.liffe [http://www.euronext.com]
Commodity Futuresa
South African Futures SAFEX [http://www.safex.co.za]
Exchange
a. The Euronext is a synthesis of stock markets within the European Union including
the previous London and Paris Commodity Futures Exchanges.
38 Randy Schnepf
Table 2. Major Agricultural Commodity Futures Contracts, Futures

Exchanges, and Contract Months
Ticker Futures
Commodity specificationb Symbol Exchange Contract monthsa
Wheat, No. 2, Soft Red Winter W CBOT N,U,Z,H,K
Rough Rice, No. 2 RR CBOT U,Z,H,K,N
Oats, No. 2 Heavy O CBOT N,U,Z,H,K
Corn, No. 2 Yellow C CBOT Z,H,K,N,U
Soybeans, No. 2 Yellow S CBOT U,X,F,H,K,N,Q
Soybean Oil, crude BO CBOT V,Z,F,H,K,N,Q,U
Soybean Meal, 48% protein SM CBOT V,Z,F,H,K,N,Q,U
Wheat, No. 2 Northern Spring MW MGEc H,K,N,U,Z
Hard Red Winter Wheat indexd HRWI MGE All months
Hard Red Spring Wheat Indexd HRSI MGE All months
Soft Red Winter Wheat indexd SRWI MGE All months
National Corn indexd NCI MGE All months
National Soybean indexd NSI MGE All months
Wheat, No. 2, Hard Red Winter KW KCBOT N,U,Z,H,K
Cotton, No. 2, 1 1/16 inch CT NYCE H,K,N,U,Z
Feed Wheat WW WCE H,K,N,V,Z
Canola, No. 1 Canada RS WCE F,H,K,N,U,Z
Barely, No. 1 Canada Western AB WCE H,K,N,V,Z
Milling Wheat, European na Euronext F,H,K,N,U,X
Feed Wheat, European na Euronext F,H,K,N,U,X

Corn, French yellow na Euronext F,H,M,Q,X
Rapeseed, any origin na Euronext F,K,Q,Xe
White Maize WMAZ SAFEX H,K,N,U,Z
Yellow Maize YMAZ SAFEX H,K,N,U,Z
Wheat WEAT SAFEX H,K,N,U,Z
Sunflower SUNS SAFEX H,K,N,U,Z
Source: Compiled by CRS from sources listed in Appendix Table 1. na = not
applicable.
a
Jan = F; Feb = G; Mar = H; Apr = J; May =K ; June = M; July = N; Aug. = Q; Sep. = U; Oct.
= V; Nov. = X; and Dec. = Z.
b
Refer to the contract specification information available at each exchanges website provided
in Appendix Table 1. In general, other grades are available for delivery at quality
premiums and discounts.
c
The MGE introduced a durum futures contract in 1998. However, the durum contract was
ended on March 20, 2003, due to low volume.
d
Cash settlement only, no physical delivery of the commodity is accepted.
e
For 2004, the April (J) and June (M) contract months are available.
Table 3. Annual Release Schedule for Key USDA

Crop and Market Information Reports
Datea Report title Contentsb

Mo. Yr.
Jan. T Winter Wheat & 1st estimate of planted area for U.S. winter wheat
Rye Seedings and rye.
Jan. T Grain Stocks Estimate of U.S. stocks by position (on- and off-
farm) for all wheat, coarse grains, and oilseeds on
January 1.
Jan. T Rice Stocks Estimate of U.S. stocks by type (long, medium-
short, and broken) for milled and rough rice on
January 1.
Mar. T Prospective Planting intentions for U.S. spring-planted crops.
Plantings
Mar. T Grain Stocks Estimate of U.S. stocks (on- and off-farm) for all
wheat, coarse grains, and oilseeds on March 1.
Mar. T Rice Stocks Estimate of U.S. stocks by type for milled and
rough rice on March 1.
May T Crop Production 1st estimate of yield and harvested area for U.S.
winter wheat.
May T WASDE 1st projection for marketing year (T/T+1) of: U.S.
season-average farm prices (SAFP); U.S. and
foreign total supply and use balance (S&U)c for
rice, cotton, oilseeds, wheat, and coarse grains;
and foreign country (S&U) for coarse grains and

wheat.
June T Grain Stocks Estimate of U.S. stocks (on- and off-farm) for all
wheat, coarse grains, and oilseeds on June 1.
June T WASDE All available S&Us are updated based on new
market information.
June T Acreage 1st estimate of planted area for U.S. spring-
planted crops.
July T Crop Production 1st estimate of yield for U.S. spring wheat, barley,
oats, durum, and rye. 1st production estimate
based on June Acreage estimate of harvested area
for major crops.
July T WASDE 1st projection for foreign country (S&U) for rice,
cotton, and oilseeds. All available S&Us are
updated based on new crop and market
information.
Aug. T Rice Stocks Estimate of U.S. stocks by type for milled and
rough rice on August 1.
Aug. T Crop Production 1st estimate of yield and harvested area for U.S.
coarse grains, rice, cotton, oilseeds, sugar cane,
and sugar beets.
Aug. T WASDE All S&Us are updated based on new crop and
market information.
40 Randy Schnepf
Table 3. Continued
Datea Report title Contentsb

Mo. Yr.
Sept. T Grain Stocks Estimate of U.S. stocks (on- and off-farm) for all
wheat, coarse grains, and oilseeds on Sept. 1.
Sept. T Crop Production New yield estimates and possible harvested area
adjustments for U.S. coarse grains, rice, cotton,
oilseeds, sugar cane, and sugar beets.
Sept. T WASDE All S&Us are updated based on new crop and
market information.
Oct. T Rice Stocks Estimate of U.S. stocks by type for milled and
rough rice on October 1.
Oct. T Crop Production New yield estimates and possible harvested area
Oct. T WASDE All S&Us are updated based on new crop and
market information.
Nov. T Crop Production New yield estimates and possible harvested area
Nov. T WASDE All S&Us are updated based on new crop and
market information.
Dec. T Crop Production New yield estimates and possible harvested area
adjustments for U.S. cotton.
Dec. T WASDE All S&Us are updated based on new crop and
market information.
Jan. T+1 Crop Final planted and harvested area, yield, and
Production, production for U.S. crops.
WASDE
Jan. T+1 Winter Wheat & Final planted and harvested area for U.S. winter
Rye Seedings wheat.
Source: USDA, NASS for Winter Wheat and Rye Seedings, Prospective Plantings, Acreage,
Crop Production, Grain Stocks, and Rice Stocks reports; USDA, WAOB for the WASDE report.
a
T represents the current calendar year; T-1 represents the previous calendar year; and T+1 represents
the next calendar year. Season-average prices and supply-and-use balances are calculated for a
crop’s marketing year, i.e., the 12-month period starting from the first harvest month in the crop’s
primary growing region. Because most of the marketing year for most crops extends over parts of two
different calendar years, they are represented by the expressions T/T+1. For example, the 2005-
2006 marketing year is often referred to simply as the 2005 marketing or crop year. For the
specific release date of a USDA report in 2006, see a calendar of 2006 release dates at
[http://www.whitehouse.gov/omb/inforeg/pei_calendar2006.pdf].
b
In USDA reports the terms estimate, forecast, and projection have very distinct and different
meanings. See section “Estimates, Forecasts, & Projections” for a description.
c
These preliminary U.S. S&U projections use: linear-trend yield forecasts; planting intentions area from
the Prospective Plantings report; and the historical harvested-to-planted area relationship to derive
harvested area for U.S. spring-planted crops. Winter wheat harvested area is available from the Crop
Production report for May.
Table 4. Major NASS Crop Production Reports
Acreage
Winter Wheat and Rye Seedings report (January) contains the first forecast of winter
wheat and rye planted area.
Prospective Plantings report (end of March) is a survey of farmer planting intentions all
spring-planted field crops as of early March.
Acreage report (late June) is a survey of actual and intended farmer plantings of all field
crops as of early June. This survey represents the first area forecast for crops.
Small Grains Summary (late September) contains the first estimate of winter and spring
wheat harvested area for the just-finished marketing year.
Yields
Crop Progress reports are released weekly between April and November. Each report
contains state- and national-level information on:
(1) Crop progress as of the report date in terms of plantings, various plant growth stages,
and harvesting. Comparisons are made with the previous week, the previous year, and the
five-year average.
(2) Crop condition rated as percent that is: very poor, poor, fair, good, and excellent.
The Weekly Weather and Crop Bulletin provides a weekly weather update for the
principal crop producing regions. It includes weather map contours and indexes for crop
moisture, extreme minimum and maximum temperatures, weekly precipitation, departure
from average temperature, growing degree days, and a summer review of national
weather, as well as the long-term Palmer drought severity index. In addition, the bulletin
contains an international weather and crop summary for major foreign production regions.
Production
Crop Production reports are released monthly throughout the calendar year. Each report
contains state-by-state area, yield, and production estimates for major field and specialty
crops. The crop coverage varies in each report with a focus on those crops that are
currently in an active seasonal growth pattern.
The Agricultural Prices report, released monthly throughout the calendar year, contains
estimates of previous month’s average farm price received for major field and specialty
crops, as well as for livestock, poultry, meat, and produce. Each report also contains a
preliminary farm price estimate for the current month. Monthly average prices are
weighted by marketings. Each report also includes an all-farm products index of prices
received and prices paid index for commodities and services, interest, taxes, and farm
wages paid. The July issue includes an annual summary.
Crop Values — Annual Summary, released in February, includes state-by-state estimates
for average prices received and the value of production for the preceding crop marketing
years for major field and specialty crops.
Source: USDA, NASS.
42 Randy Schnepf
REFERENCES
[1] Other U.S. feed grain crops (primarily grain sorghum, barley, and
oats) are briefly mentioned in the discussion of corn as the principal
U.S. feed grain crop. Other U.S. oilseeds crops (primarily sunflowers,
rapeseed, canola, peanuts, and cottonseed) are briefly mentioned in the
discussion of soybeans as the principal U.S. oilseed crop.
[2] For more information see the “2002 Census of Agriculture United States”
available at [http://www.nass.usda.gov/Census_of_Agriculture/index.
asp].
[3] Stephen Amosson, Jim Mintert, William Tierney, and Mark Waller,
Knowing and Managing Grain Basis, RM2-3.0, 6-98, Texas
Agricultural Extension Service.
[4] For a discussion of agricultural transportation issues and the cost
advantages of barge versus truck or rail, see CRS Report RL3 2470,
Upper Mississippi River-Illinois Waterway Navigation Expansion: An
Agricultural Transportation and Environmental Context, coordinated
by Randy Schnepf, pp. 27-34.
[5] For a brief introduction to U.S. agricultural programs see CRS Report
RS20848, Farm Commodity Programs: A Short Primer, by Geoffrey S.
Becker.
[6] Fiscal year data; USDA, Farm Service Agency, Budget Table 35, “CCC Net
Outlays by Commodity and Function,” available at [http://www.fsa.
usda.gov/dam/bud/bud1.htm].
[7] For more information on the type and extent of foreign intervention in
domestic agricultural sectors see CRS Report RL306 12, Agriculture in the
WTO: Member Spending on Domestic Support, by Randy Schnepf.
[8] For information on U.S. futures exchanges and the rules and
regulations for trading commodity futures see the Commodity Futures
Trading Commission (CFTC) website at [http://www.cftc.gov/].
[9] See Appendix Table 1 for futures exchange websites where contract
specifications and other relevant information is posted.
[10] Handbook of Futures Markets, “Chapter 26 — Wheat,” by Donna
Nielsen Murphy, Copyright © 1984 by John Wiley & Sons, Inc., p.
11.
[11] For more information on futures market terminology see, “The CFTC
Glossary,” CFTC, available at [http://www.cftc.gov/opa/glossary/
opaglossary_a.htm].
[12] Douglas Gordon, “Performance of Thin Futures Markets: Rice and

Sunflower Seed Futures,” Agricultural Economics Research, vol. 36,
no. 4, fall 1984, pp. 1-27.
[13] Forward contracting involves fixing the contract price for future delivery.
Often such forward contract prices are made relative to a specific
futures contract price, e.g., a March forward contract for the sale of
wheat in July may set the eventual sale price at 5 cents under the
closing price of the July CBOT wheat contract. Hedging involves the
purchase or sale of a futures contract as a temporary substitute for a cash
transaction that will occur later to minimize the risk of financial loss from an
adverse price change. For example, a producer may sell a harvest-time
futures contract at planting time as a hedge against the risk that
market prices will fall before the crop is ready for market.
[14] Commodity Trading Manual, Board of Trade of the City of Chicago,
1985, pp. 113-124.
[15] For a geographic mapping of corn, soybean, and wheat basis distributions
see “January 2004 Spatial Basis Report,” by Kevin McNew and Duane
Griffith, Briefing No. 64, Agricultural Marketing Policy Center,
Montana State University, February 2004 at
[http://www.ampc.montana.edu/publications/AMPCpublications.html].
[16] Commodity Trading Manual, ©Board of Trade of the City of

Chicago, 1985, pp. 68-70.
[17] Ibid., p. 64.
[18] Actual carrying charges will vary with the commodity price level,
the interest rate, and the fees associated with insurance and other time-
related charges.
[19] A crop’s marketing year is the 12-month period starting from the first
harvest month in the crop’s primary growing region.
[20] The release schedule for USDA’s 2006 reports is available at
[http://www.whitehouse.gov/omb/inforeg/pei_calendar2006.pdf]. For
more information on NASS operations and data collection methods see
Scope and Methods of the Statistical Reporting Service, USDA, NASS,
Misc. Publication, No. 1308, Revised Sept. 1983.
[21] For a brief description of the USDA agencies involved, the types of
data used, and the structure used to prepare market forecasts, see USDA’s
Economic Research Service(ERS), Outlook Reports: USDA Outlook Process at
[http://www.ers.usda.gov/publications/outlook/ process.htm].
44 Randy Schnepf
[22] For more information, visit NASS online at [http://www.nass.

usda.gov]. NASS reports may be accessed at [http://www.usda.
gov/nass/pubs/estindx.htm].
[23] For information on NASS crop production surveys and reports see
Understanding USDA Crop Forecasts, USDA, NASS, Miscellaneous
Publication, No. 1554, March 1999, available at
[http://www.usda.gov/nass/nassinfo/pub 1 554.htm].
[24] NASS Crop Production reports are available at
[http://usda.mannlib.cornell.edu/reports/ nassr/field/pcp-bb/].
[25] For discussion purposes, T represents the current year; T- 1
represents the preceding year; and T+1 represents the following year,
often referred to as the outyear.
[26] Crop Progress reports are available at
[http://usda.mannlib.cornell.edu/reports/nassr/field/ pcr-bb/].
[27] Weekly Weather and Crop Bulletin are available at [http://www.usda.
gov/ oce/waob/j awf/ wwcb.html].
[28] The WASDE report and information on the WAOB are available at
[http://www.usda.gov/ agency/oce/waob/].
[29] ERS commodity outlook reports are at [http://www.ers.usda.
gov/publications/outlook/].
[30] For more information on national and state programs that support corn-based
ethanol production, see CRS Report RL327 12 Agriculture-Based
Renewable Energy Production, by Randy Schnepf.
[31] For a review of market events during 1972-1974 see, USDA, ERS,
“Global Grain Markets in 1996: Shares of 1972-74?”by Pete Riley,
Agricultural Outlook, Sept. 1996, pp. 2-6.
[32] More information on FAS’ Export Sales Reporting Program is
available at [http://www.fas.usda.gov/info/esrbrochure 04/esrbrochure
04.htm].
[33] The Export Sales report is available at [http://www.fas.usda.
gov/export-sales/esrd1 .asp].
[34] The weekly grain and oilseed inspection report is available at
[http://www.ams.usda.gov/lsmnpubs/grainn.htm].
[35] For more information see U.S. Census Bureau, Foreign Trade
Statistics,”available at [http://www.census.gov/foreign-trade/www/].
[36] FAS attache reports are available at [http://www.fas.usda.gov/
scriptsw/attacherep/ default. asp].
[37] PECAD reports on international crop area, yield, and production
estimates are available at [http://www.pecad.fas.usda.gov/].
[38] A listing of FAS commodity divisions and their monthly circulars are
available at [http://www.fas.usda.gov/commodities.asp].
[39] FSA commodity program outlay data are available at
[http://www.fsa.usda.gov/ dam/bud/bud1.htm]. FSA data on
commodity price support activity is available at
[http://www.fsa.usda.gov/dafp/psd/reports.htm].
[40] RMA’s “National Summary of Business” reports for crop insurance are
available at [http://www.rma.usda.gov/data/sob.html].
[41] For more information, see the CRS Report RS2 1613, Conservation
Reserve Program: Status and Current Issues, by Barbara Johnson.
[42] FAS information on U.S. food aid is available at
[http://www.fas.usda.gov/food-aid.asp]. Information on U.S. agricultural
export credit program and other export assistance programs is posted at
[http://www.fas.usda.gov/export.html].
[43] USDA is prohibited by law from publishing cotton price projections
[12 U.S.C. 1 141(j)(d)].
[44] AMS’s market news website is located at [http://www.ams.usda.gov/
marketnews.htm].
[45] For these and other market reports visit [http://www.ams.usda.gov/
lsmnpubs/grainn.htm].
[46] For empirical evidence, see USDA, ERS, Price Determination for Corn and
Wheat, TB- 1878, Paul Westcott and Linwood Hoffman, July 1999;
USDA, ERS, “Factors Affecting the U.S. Farm Price of Upland
Cotton,” Leslie Meyer, Cotton and Wool Situation and Outlook, CWS-
1998, November 1998; and USDA, ERS, How Does Structural Change in the
Global Soybean Market Affect the U.S. Price?, OCS 04D-0 1, Gerald
Plato and William Chambers, April 2004; and Barry Goodwin, Randy
Schnepf and Erik Dohlman, “Modelling soybean prices in a changing policy
environment,” Applied Economics, 2005, 37, pp. 253-263.
[47] For more information, see International Financial Crises and
Agriculture, International Agriculture and Trade Reports, WRS-99-3,
USDA, ERS, March 2000.
[48] For more information on currency exchange rates and their potential
market effects see CRS Report RL3 1204, Fixed Exchange Rates, Floating
Exchange Rates, and Currency Boards: What Have We Learned?, by Marc
Labonte.
[49] William G. Tomek and Kenneth L. Robinson, Agricultural Product
Prices, 4th Ed., Cornell University Press; 2003©Cornell University, p. 2.
46 Randy Schnepf
[50] Forward contracting can be used to lock in a price prior to harvest, but
the money transfer from the buyer generally occurs after the harvest when
the physical goods are delivered.
[51] Tomek and Robinson, Agricultural Product Prices, 4th Ed., Cornell
University Press; 2003©Cornell University, pp. 25-28.
[52] For this and other farm to retail commodity price comparisons, see the
USDA, ERS briefing room Food Marketing and Price Spreads, Farm-to-
Retail Price Spreads at [http://www.ers.usda.gov/Briefing/ FoodPrice
Spreads/spreads/table1 a.htm].
[53] For more information on wheat markets, see USDA, ERS, Wheat
Briefing Room, available at [http://www.ers.usda.gov/Briefing/
Wheat/].
[54] Calculated from Appendix Table 23, Wheat Situation and Outlook
Yearbook, WHS-2003, USDA, ERS, March 2003.
[55] For definitions, see the CRS glossary Agriculture: A Glossary of Terms,
Programs, and Laws, web version, available at
[http://www.congress.gov/erp/lists/agglossary.html].
[56] USDA, ERS, Agricultural Outlook, “Assessing Agricultural
Commodity Price Variability,” by Randy Schnepf, October 1999, pp. 16-
21.
[57] For more information on corn and other feed grain markets, see
USDA, ERS, Corn Briefing Room available at [http://www.ers.usda.
gov/Briefing/Corn/].
[58] USDA, ERS, Animal Feeds Compendium, Agricultural Economic
Report No. 656, by Mark Ash, May 1992.
[59] For more information on national and state programs that support
corn-based ethanol production, see CRS Report RL327 12,
Agriculture-Based Renewable Energy Production, by Randy Schnepf.
[60] Robert N. Wisner and C. Phillip Baumel, “Ethanol, Exports and
Livestock: Will There Be Enough Corn to Supply Future Needs?,”
Feedstuffs, Issue 30, vol. 76, July 26, 2004.
[61] For more information on U.S. and international rice markets, see USDA,
ERS, Rice Briefing Room, available at [http://www.ers.usda.gov/
Briefing/Rice/].
[62] For more information on cotton and other fiber markets, see USDA,
ERS, Cotton Briefing Room available at [http://www.ers.
usda.gov/Briefing/Cotton/].
[63] For more information on the MFA and its potential effects, see
USDA, ERS, The Forces Shaping World Cotton Consumption After the
Multifiber Arrangement, Cotton Outlook Report No. (CWS-05C-01), 30

pp., April 2005, available at [http://www.ers.usda.gov/ Publications/cws/
apr05/cws05c01/].
[64] For a description of the U.S. cotton programs, see CRS Report
RL32442, Cotton Production and Support in the United States, by Jasper
Womach.
[65] For more information, see CRS Report RS22 187, U.S. Agricultural
Policy Response to WTO Cotton Decision, by Randy Schnepf.
[66] For more information on soybeans and other oilseed markets, see USDA,
ERS, Soybean and Oil Crops Briefing Room, available at
[http://www.ers.usda.gov/Briefing/ SoybeansOilCrops/].
[67] See USDA’s FAS for a description of U.S. food aid programs,
available at [http://www.fas.usda.gov/food-aid.asp].
Chapter 2
GLOBAL AGRICULTURAL SUPPLY AND

DEMAND: FACTORS CONTRIBUTING
TO THE RECENT INCREASE IN
FOOD COMMODITY PRICES*
Ronald Trostle
ABSTRACT
World market prices for major food commodities such as grains and
vegetable oils have risen sharply to historic highs of more than 60 percent
above levels just 2 years ago. Many factors have contributed to the runup in
food commodity prices. Some factors refl ect trends of slower growth in
production and more rapid growth in demand that have contributed to a
tightening of world balances of grains and oilseeds over the last decade.
Recent factors that have further tightened world markets include increased
global demand for biofuels feedstocks and adverse weather conditions in
2006 and 2007 in some major grain- and oilseed-producing areas. Other
factors that have added to global food commodity price infl ation include the
declining value of the U.S. dollar, rising energy prices, increasing
agricultural costs of production, growing foreign exchange holdings by major
food-importing countries, and policies adopted recently by some exporting
and importing countries to mitigate their own food price infl ation. This
*
This is an edited, excerpted and augmented edition of a United States Department of
Agriculture publication.
50 Ronald Trostle
report discusses these factors and illustrates how they have contributed to
food commodity price increases.
Keywords: Agricultural prices, food prices, prices, supply, demand, global

supply, global demand, food infl ation, energy prices.
ACKNOWLEDGMENTS
The report was improved by comments, questions, and suggestions, from
Mike Dwyer of the Foreign Agricultural Service, Carol Goodloe of the Offi ce
of the Chief Economists, Dave Stallings of the World Agricultural Outlook
Board, and Joy Harwood of the Farm Service Agency. Special thanks go to
Paul Westcott, Bill Coyle, and Janet Perry of the Economic Research Service
for numerous substantive contributions and for helping incorporate reviewers’
comments on a compressed schedule. Cynthia Ray produced the fi nal report
on a much shortened schedule.
INTRODUCTION*
World market prices for major food commodities such as grains and
vegetable oils have risen sharply to historic highs—more than 60 percent
above levels just 2 years ago. Retail food prices in many countries have also
risen in the last 2 years, raising concerns around the world.
No one factor has been the cause of the price runup in food commodity
prices. Some factors refl ect underlying trends in supply and demand for
agricultural commodities that began more than a decade ago. Other
developments that have contributed to the price increase have occurred more
recently. Some factors refl ect signifi cant structural changes in supply and
demand relationships; others can be interpreted as short-term shocks to global
supply and demand for agricultural products.
*
This revised report adds a timeline of factors behind rising food prices (see: “A Mix of Short-
and Long Term Factors Are Contributing to Higher Food Prices” on page 6), and new
information and data on land use associated with the production of biofuels (see: “Update
on Global Land Use in Biofuel Feedstock Production” on page 19). The new information
on biofuel land use replaces fi gure 22 in the original report. Several typographical and
formatting errors have also been corrected.
Global Agricultural Supply and Demand 51
Figure 1 shows an index of monthly prices for food commodities, e.g.,

grains, vegetable oils, meats, seafood, sugar, bananas, and various other
commodities that are the basis for human consumption of staple foods.
Although prices, measured in nominal dollars, trended slightly downward
between 1980 and 2002, there were several short periods (1980, 1983, 1988,
and 1996) when prices did rise from the previous year. After 2001, prices
began to rise slowly and by 2004 reached the level that they had been in the
mid-1980s. In early 2006, commodity food prices began to rise more quickly.
During the last 2 years, prices of these commodities rose sharply to a new
high, more than 60 percent above what they were 2 years ago.
Figure 2 puts the evolution of the food commodity price index into
broader perspective. Monthly price indices for wheat, rice, corn, and soybeans
back to 1970 have been added to the index for food commodity prices. Wheat
and rice account for much of the world food consumption of grains. Corn is
used for both food and animal feed. Soybeans provide vegetable oil for human
consumption and protein feed for animals. Combined, the four crops account
for a large share of the staple foods that are consumed globally.
Source: International Monetary Fund: International Financial Statistics.
Figure 1. Food commodity prices rose more than 60 percent in the last 2 years.
52 Ronald Trostle
Figure 2. Food commodity price spikes since 1970.
Two general patterns are especially signifi cant in fi gure 2. First, the index of
average food commodity prices (data only available back to January of 1980)
closely tracks the prices of the four major crops (wheat, rice, corn, and soybeans),
although in a somewhat dampened manner. Second, there have been periodic
spikes in the prices of the four crops during the last 38 years. Although some of
the price spikes focused on only one of the crops, in general the prices of all four
crops rise and recede in a similar pattern. This occurs because buyers can
substitute among these or other commodities, whether for food use or animal feed
use, and purchase whichever is cheaper. With the exception of the early 1970s,
each period of rapidly rising prices was followed by a retreat back to their pre-
spike level.
The question on the minds of many consumers around the world is, “Will
food prices drop again this time?” Or, stated another way, “Is the current price
spike any different from those of the past, and if so, why?”
Before we begin to explore the factors contributing to the most recent rise in
food commodity prices, two more additions to the graph provide an even broader
perspective on the current increase in food commodity prices.
Figure 3 charts the price index for food commodities along with an index for
the average of all commodities and an index for crude oil. Although the food
commodity index has risen more than 60 percent in the last 2 years, the index for
all commodities has also risen 60 percent and the index for crude oil has risen
even more.
Since mid-1999, when all three indices were at about the same level (and
were about where they had been 10 years earlier), food commodity prices have
risen 98 percent (as of March 2008); the index for all commodities has risen 286
percent; and the index for crude oil has risen 547 percent. In this perspective,
the recent rise in food commodity prices might not seem so severe after all.
However, because an increase in the price of food—a basic necessity—causes
hardships for many lower income consumers around the world, food-price infl
ation is socially and politically sensitive. That is why much of the world’s
attention is now focused on the increase in food prices more so than on the
more rapid increase in prices of other commodities.
Figure 3. Prices of many commodities rose.
LONG-TERM TRENDS
A number of long-term, slowly evolving trends have affected the global
supply and demand for food commodities. The impact of these trends has been to
slow growth in production and to strengthen demand. The resulting tightening of
the global supply and demand balance has gradually put upward pressure on
agricultural prices. Many of these long-term trends have been exacerbated by the
more recent developments that have put additional upward pressure on world
prices by further reducing supplies and increasing demand.
54 Ronald Trostle
The annual growth rate in the production of aggregate grains and oilseeds has
been slowing. Between 1970 and 1990, production rose an average 2.2 percent per
year. Since 1990, the growth rate has declined to about 1.3 percent. USDA’s 10-
year agricultural projections for U.S. and world agriculture see the rate declining
to 1.2 percent per year between 2009 and 2017.[1]
Growth in productivity, measured in terms of average aggregate yield, has
contributed much more to the growth in production globally than has expansion in
the area planted to grains and oilseeds. Global aggregate yield growth averaged
2.0 percent per year between 1970-1990, but declined to 1.1 percent between
1990 and 2007. Yield growth is projected to continue declining over the next 10
years to less than 1.0 percent per year.
The growth rate for area harvested has averaged only about 0.15 percent per
year during the last 38 years. In USDA’s agricultural projections, crop prices do
not decline much over the next decade. The continued higher prices provide the
incentive for producers to respond by increasing the area allocated to crops during
the coming decade. Some of this expanded area planted will come from land
converted to cropland from non-cropland uses, such as pasture and forest. Area
harvested will also increase as a result of more intensive use of existing cropland,
generally from double-cropping and reduced fallow area.
Reduced agricultural research and development by governmental and
international institutions may have contributed to the slowing growth in crop

yields. Stable food prices during the last two decades have led to some
complacency about global food concerns and to a reduction in R&D funding
levels. Although private sector funding of research has grown, private sector
research has generally focused on innovations that private companies could sell to
producers. These have often been cost-reducing rather than yieldenhancing
technological developments. Publicly-funded research might be more likely to
focus on innovations that would increase yields and production, particularly in
parts of the world where farmers are unable to pay royalties for new varieties of
seeds.
Other trends show an even longer history of gradually slowing production
growth.
• For decades, each year a small percentage of the world’s agricultural land
has been converted to nonagricultural uses.
• The ability to obtain more water for agricultural uses has gradually
become more diffi cult, either because gravity-fl ow irrigation systems
are more diffi cult and expensive to develop, or because irrigation wells
have to be dug deeper as water tables decline.
These factors are changing slowly and likely played a negligible role in the
recent increase in world prices. Additionally, although climate change has
increasingly become a concern, its impact on crop production is unclear.
A Mix of Short- and Long-Term Factors

Are Contributing to Higher Food Prices
A number of factors have contributed to the tight market conditions that

set the stage for the sharp increase in food commodity prices since 2002.
Some factors refl ect underlying trends in supply and demand for agricultural
commodities that began more than a decade ago. Trends of more rapid
expansion in demand and slower growth in production began in the 1990s,
and contributed to declining global demand for stocks of grains and oilseeds
since 2000. Then, rising crude oil prices and changing biofuel policies
provided incentives to expand biofuel production in some countries. Also,
since the early 2000s, the declining value of the dollar and the foreign
accumulation of foreign exchange reserves (U.S. dollars) enabled some
countries to increase food commodity imports, even as world prices
denominated in dollars reached record highs. On the supply side, largely due
to rising energy prices, production costs for most of the world’s farmers were
increasing and, in 2006 and 2007 adverse weather in a number of countries
reduced global production of grains and oilseeds.

Together, these factors resulted in declining global stock-to-use ratios for
aggregate grains and oilseeds which, by 2007, fell to the lowest levels since
1970. Importers faced declining market supplies and many countries
experienced politically sensitive increases in domestic food prices, leading
some to contract aggressively for future imports, even at world record prices.
Finally, in late 2007 and early 2008, various exporters of food commodities
imposed restrictions on exports in an attempt to moderate domestic food price
infl ation. These actions, combined with the already tight market conditions,
set the stage for the further rapid increases in food prices in late 2007 and
early 2008.
56 Ronald Trostle
Factors contributing to higher food commodity prices.

The demand for agricultural commodities has also been affected by some
long-term trends. Over the last decade, strong global growth in average income
combined with rising population to increase the demand for food, particularly in
developing countries. As per capita incomes rose, consumers in developing
countries not only increased per capita consumption of staple foods, they also
diversifi ed their diets to include more meat, dairy products, and vegetable oils,
which in turn, amplifi ed the demand for grains and oilseeds.
Global economic growth has been strong since the late 1990s (fi g.5). For
developing countries, growth has been quite strong since the early 1990s. Growth
in Asia has been exceptionally strong for more than a decade. Unusually rapid
economic growth in China and India, with nearly 40 percent of the world’s
population, has provided a powerful and sustained stimulus to the demand for
agricultural products.
Rapid economic growth in developing countries has also resulted in very
rapid growth in the demand for energy for electricity and industrial uses, as well
as for transportation fuel. The associated increase in petroleum use in developing
countries has contributed to rapidly rising oil prices since 1999. The oil imports of
China alone grew more than 21 percent per year from 194 million barrels in 1996
to 1.37 billion barrels in 2006.
Exponential trend growth rates:

1970-90 90-07 2009-17
Production 2.2 1.3 1.2
Yields 2.0 1.1 0.8

Area 0.15 0.14 0.39
Population 1.7 1.4 1.1
Per capita production 0.56 0.11 0.02
1
Total oilseeds = soybeans + rapeseed + sunflowers.
Source: USDA Agricultural Projections to 2017.
Figure 4. Total world grain & oilseeds1. Production, yield, area harvested, population
& per capita production.
The world’s population growth rate has been trending down since before the
1970s (fi g. 6). This declining trend applies to nearly all countries and regions of
the world. However, the number of people on earth is still rising by about 75
million (1.1 percent) per year. This rising population adds to the global demand
for agricultural products and energy. The impact on demand is amplifi ed because
the most rapid population growth rates tend to be in developing countries. Many
of these have rapidly rising incomes, again particularly important for agricultural
demand due to diet-diversifi cation. Figures 7-12 illustrate how the rapid increase
in global demand for agricultural products is facilitated by growth in imports.
Note that much of the demand growth comes from developing countries.
58 Ronald Trostle
Figure 5. Strong economic growth. Average real GDP growth rates.

Figure 6. Population growth rates decline. But still high in developing countries.

1
European Union, former Soviet Union, and other Europe.
2
Asia excluding India and China.
3
I ncludes Mexico.
Figure 7. Global soybean oil imports.


1
European Union, former Soviet Union, and other Europe.
2
Includes Mexico.
Figure 8. Global rice imports.
60 Ronald Trostle

1
EU-27 excludes intra-trade after 2002, EU-15 intra-trade before 2003, Slovenia before
1992.
2
Former Soviet Union and other Europe; prior to 1999, includes Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.
Figure 9. Global coarse grain imports.


1
Includes Mexico.
2
1992.
Figure 10. Global soybean imports.

1
Selected importers.
Figure 11. Pork imports1.


1
Selected importers.
2
1992.
Figure 12. Poultry imports.1
62 Ronald Trostle
INCREASED MEAT CONSUMPTION MEANS

INCREASED DEMAND FOR GRAIN AND PROTEIN FEEDS
Global consumption of meat has been growing much more rapidly than
consumption of grains and oilseeds. Between 1985 and 1990, production of meat
(beef, pork, chicken, and turkey) rose more than 3 percent per year. Since this was
well above the world’s population growth rate of 1.7 percent per year, per capita
consumption was able to climb by 1.4 percent per year. Although the average
growth rates in production and per capita consumption of meat have declined
somewhat since 1990, they are still well above the growth rates for aggregate use
of grains and oilseeds.
As the demand for meat rises, the demand for grain and protein feeds used to
produce the meat grows proportionally more quickly. Feed-to-meat conversion
rates vary widely depending on the class of animal and the production practices
used to produce the meat. The feed-to-product conversion factors below show an
upper bound of how much the demand for feed increases for every 1-pound
increase in meat consumed using the typical U.S. production system.
Source: Ephraim Leibtag, “Corn Prices Near Record High, But What About Food Costs?”
In Amber Waves, February 2008. http://www.ers.usda.gov/AmberWaves/February08/
Features/Corn Prices.htm.
Exponential trend growth rates
1975-90 90-07 2009-17

Production 2.2 2.5 2.1
Population 1.7 1.4 1.1
Percapita use 1.4 1.1 1.0

1
Total meat = beef + pork + chickens & turkeys.
Figure 13. Global meat. 1 Production, per capita consumption, and population.
DEVELOPMENTS SINCE 2000

As the new century began, the trends discussed above resulted in slowing
growth in production and increasing growth in demand. At the same time, policy
decisions in China led to a reduction of its grain stocks. And elsewhere, there
were incentives for governments and the private sector to reduce stocks.
Government-held buffer stocks were deemed to be less important after nearly two
decades of low and stable food prices. For the private sector, the cost of holding
stocks, use of “just-in-time” inventory management, and years of readily available
global supplies provided incentives to reduce stock holding. Over the last decade,
the shift toward more liberalized trade reduced trade barriers and facilitated trade,
which in turn reduced the need for individual countries to hold stocks.
As a result of these factors, global consumption of aggregate grains and
oilseeds exceeded production in 7 of the 8 years since 2000 (fi g. 14). And since
1999, the global stocks-to-use ratio for the aggregate of grains and oilseeds
declined from about 30 percent to less than 15 percent currently— the lowest
level on record since 1970 (fi g. 15). The resulting low level of world stocks in
2007 has caused importing countries to become anxious about being able to
obtain their future food needs.
64 Ronald Trostle
In 2000, the price of crude oil began to rise—slowly at fi rst (see fi g. 3). The
underlying trends of rapid economic growth and demand for energy led to rapidly
rising use of crude oil in developing countries.
Beginning in 2002, the U.S. dollar began to depreciate, fi rst against OECD
country currencies, and later against many developing countries’ currencies. As
the dollar lost value relative to the currency of an importing country, it reduced
that country’s cost of importing. Since the United States is a major source of
many agricultural commodities, foreign countries’ imports of commodities from
the United States began to rise. This put upward pressure on U.S. prices for those
commodities. Further, since the world price of major crops are typically
denominated in U.S. dollars, the depreciation of the dollar also raises prices
(measured in dollars).
Crude oil is also denominated in U.S. dollars, and the declining value of the
dollar enabled importing countries to increase their oil imports. This increase in
global demand for oil (in addition to the underlying trend resulting from rapid
economic growth in developing countries) put additional upward pressure on the
world price of crude oil, and in 2004 oil prices began to rise more rapidly than in
prior years.
Source: USDA PS&D Database.
Figure 14. Total world grain & oilseeds. Production and total use.
Figure 15. Total world grain & oilseeds. Stocks and stocks-to-use ratio.
Source: ERS International Macroeconomics Dataset.

1
Real U.S. agricultural trade-weighted dollar exchange rate, using U.S. agricultural export
weights, based on 192 countries.
Figure 16. Value of U.S. dollar declines after 20021.
66 Ronald Trostle
THE ROLE OF BIOFUELS

Biofuels have been produced and used in small amounts in several countries
in recent decades. Production generally grew slowly until after the turn of the
century. U.S. ethanol production began to rise more rapidly in 2003; EU biodiesel
production began to increase more rapidly in 2005.
Brazil and the United States account for most of the world’s ethanol
production. Brazil uses sugarcane as a feedstock, while the United States uses
nearly all corn. A number of other countries have policy initiatives designed to
increase ethanol production, but so far the total augmentation in production
capacity has been small relative to the combined capacity of Brazil and the United
States. In 2006, China reversed its decision to invest in facilities to produce more
ethanol from grain. Given its food policies, China is now focusing on using
cassava and sweet potatoes as feedstocks for future increases in ethanol
production.
The European Union is the largest biodiesel producer, and rapeseed oil is its
main feedstock. The EU has mandated that biofuels account for 10 percent of
transportation fuel use by 2020. The EU cannot produce suffi cient rapeseed to fi
ll the mandate and will have to import either some feedstocks for producing
biodiesel, or some biodiesel. Russia and the Ukraine are increasing rapeseed
production destined for export to the EU as rapeseed, rapeseed oil, and perhaps as
biodiesel. Brazil and Argentina are using soybean oil as a feedstock to expand
biodiesel production. Brazil’s biodiesel will mostly be produced in the Center
West part of the country and will replace petrol-diesel traditionally trucked in
from the coast. Most of Argentina’s biodiesel production is destined for the export
market. Canada is expanding biodiesel production in the Prairie Provinces using
rapeseed as the feedstock.
U.S. ethanol production began to expand rapidly in 2003. There were several
incentives for expanding ethanol production: the increasing price of petroleum;
concerns about the reliability of some traditional exporters; concerns about the
pollution effects of methyl tertiary butyl ether (MTBE) and initial switching from
MTBE to ethanol; and an environmental objective to increase the use of cleaner
burning fuels. Without these developments, the increase in U.S. and world
biofuels production would not have been nearly as great.
Figure 17. Ethanol production. Mostly from grain feedstocks except for Brazil.
Figure 18. Biodiesel production.
68 Ronald Trostle

1
Food, seed, and industrial less ethanol.
Figure 19. U.S. corn use.
Corn used for ethanol rose from about 1 billion bushels in 2002/03 to a
projected 3.1 billion bushels in the current (2007/08) crop year. With this
increase, corn used for ethanol production now accounts for about 24 percent of
total U.S. corn disappearance, up from 10 percent in 2002/03. This increase was
facilitated because U.S. corn production rose in response to increased demand and
prices, and, in general, other uses of U.S. corn (food, feed, non-ethanol industrial
uses, and exports) did not decline.
Figures 20 and 21 provide perspectives about the importance of grain used to
produce ethanol relative to the total demand for grain used for all purposes over
1980-2002 and over the most recent 5 years. For both charts, average
contributions to the markets, as well as marginal contributions to recent growth
are discussed.
Historically, the amount of grain used to produce ethanol has been a small
percentage of the global total used for all purposes. Furthermore, during the 1980s
and 1990s, the increase in grain used to produce ethanol accounted for a small
percentage of the total increase in demand. Between 1980 and 2002 (before the
more rapid growth in ethanol production in the United States began), the amount
of corn used to produce ethanol in the United States rose by 24 million metric
tons. During the same period, global feed use of wheat and coarse grains
increased 144 million metric tons, and food and other non-feed uses (besides U.S.
corn for ethanol) increased by 160 million tons. Of the total increase in the
demand for wheat and coarse grains (corn, barley, sorghum, rye and oats), ethanol
accounted for 7 percent, feed use for 44, and food and other non-feed use, except
for U.S. ethanol, for 49 percent. During this period, the strong growth in global
demand for food and feed far surpassed the demand for industrial uses of grain.
Biofuels was only one of several rising industrial uses of grain (fig. 21).
Note: Category’s share of the change in total use from 1980/81to 2002/03 shown at the
right.
Figure 20. Global wheat and coarse grains use, 1980/81– 2002/03. U.S. ethanol
accounted for 7 percent of historical global growth.
Note: Category’s share of the change in total use from 2002/03 to 2007/08 shown at the
right.
Figure 21. Global wheat and coarse grains use, 2002/03 – 2007/08. U.S. ethanol has
accounted for 30 percent of recent global growth.
70 Ronald Trostle
Ethanol output increased rapidly after 2002, and from the perspective of
global market changes from 2002 onward, provides a somewhat different picture.
Between 2002 and 2007, the quantity of U.S. corn used to produce ethanol rose by
53 million metric tons. This accounted for 30 percent of the global growth in
wheat and feed grains use. Feed use grew by 48 million tons and accounted for 27
percent of the increase in total use. Food and other nonfeed uses climbed 79
million tons and accounted for 44 percent of the global increase in wheat and
coarse grains use.
The data suggest that while U.S. corn used for ethanol production had only a
small effect on global markets in the 1980s and 1990s, the increase in U.S.
ethanol production over the past 5 years and the related signifi cant changes in the
structure of the U.S. corn market have had a more pronounced impact on the
world’s supply and demand balance for total coarse grains recently. Importantly,
since the United States is the world’s largest corn exporter, some of the higher
prices resulting from increased U.S. demand has spilled over onto world markets.
Most feedstocks used to produce biofuels come from annual crop production.
Perennial crops, such as oil palm and coconut, as well as previously used
vegetable oils and fats, that are feedstocks for biodiesel are the primary
exceptions. Use of crops for biofuel may divert some cropland away from
producing crops used for food, feed, and non-biofuel industrial uses. However, in
some cases, coproducts such as distiller’s grains (a byproduct when producing

ethanol from corn) or soybean meal (a joint product in producing soybean oil
from soybeans), continue to be available for food or feed use when biofuels are
produced. Also, because global total area harvested is rising, increases in land
used to produce biofuel feedstocks have not led to equivalent declines in area
planted to traditional food and nonfood uses.
A rough estimate suggests that about 47.8 million acres were used to provide
biofuel feedstocks in the 6 major producing countries in 2007 (see box). This
would account for about 3-4 percent of arable land in these countries.
Update on Global Land Use in Biofuel Feedstock Production
Since the initial release of this report in May 2008, ERS has compiled
additional information for estimating 2006/07 land used for biofuel feedstock
production in other countries for 2007, as well as fi nal data for updating
estimates for the United States. These estimates cover the 6 major countries
producing biofuel—either ethanol or biodiesel—together accounting for
about 95 percent of global biofuel output in 2007. Estimates of biofuel
production for 2007 are combined with crop yields and feedstock-biofuel
conversion factors for 2006/07 crop years to derive implied harvested areas of
the major feedstocks used in each country (see table). These estimates do not
include land used for minor feedstocks in these countries, or biofuel feedstock
production in other countries, such as Thailand, India, and Indonesia.
Despite rapid global expansion in biofuel production, total land cultivated
in biofuel feedstocks amounted to about 47.8 million acres in 2006/07, or 3-4
percent of arable land, in the top six producing countries.* The United States
accounted for about 46 percent of the global total, followed by the EU and
Brazil. Per acre biofuel yields (combining both crop yields and feedstock-
biofuel conversion factors) in 2007 range from from 66 gallons for U.S.
soybeans, to 140 gallons for EU rapeseed, to 403 gallons for U.S. corn, to 710
gallons for Brazilian sugarcane. With higher yields from sugarcane, Brazil
produced about 76 percent more ethanol per acre of land in 2007 than the
United States.
*Land used to produce biofuel feedstocks may also produce food or feed coproducts.
Examples include distiller’s grains (produced when corn is converted to ethanol
by the dry-mill method) and soybean meal (a joint product of processing of
soybeans to produce soybean oil, a biodiesel feedstock). These calculations do
not include deductions for the area equivalent of coproducts.
72 Ronald Trostle
Biofuel Production and Land Use by Major Producing Countries,

2006/07
Note: When countries import/export feedstock for processing, calculations based on

biofuel production overstate/understate feedstock area in that country.
1
China ethanol production for 2007 from USDA/FAS GAIN report.
2
U.S. ethanol production for 2007 from Renewable Fuel Association
(http://www.ethanolrfa.org/).
3
Unless otherwise noted, biofuel production data for 2007 are from FO Licht, various
publications.
4
Percentages indicate feedstock shares of ethanol or biodiesel production; 100 percent
is assumed when shares of other feedstocks are small.
5
Biofuel yields based on 2006/07 crop yields from the USDA PS&D database and
biofuel conversion factors based on USDA estimates for the United States and
various USDA/FAS GAIN reports for foreign countries.
6
Implied area estimates are adjusted for share of biofuel production from the major
feedstocks indicated. 7Arable land data are from FAO.
FURTHER DEVELOPMENTS
Developments in 2004
In 2004, agricultural production costs began to rise, especially for

energyrelated inputs such as fertilizer, fuel, and pesticides. Although there was a
lag between the increase in petroleum prices and when farmers began to pay more
for fertilizer, fertilizer prices have risen sharply. In the long run, farmers must
cover their costs of production. Farm output prices will increase because of
reductions in output, until production again becomes profi table, or because of
offsetting price increases due to demand strength.
Developments in 2005/06
In early 2006, food commodity prices began to rise more rapidly than in
previous years. This increase refl ected many diverse and not necessarily related
factors.
During 2006, hedge funds, index funds, and sovereign wealth funds became
more involved in agricultural commodity markets. The investors in these funds
were not so much interested in agricultural commodities as they were in using

commodities to diversify their fi nancial portfolios. The funds held an
increasingly large percentage of open interest in the futures market for agricultural
commodities, as well as of nonagricultural commodities such as metals and
energy. These investors only had a fi nancial interest in the markets and did not
intend to take delivery of the agricultural commodities. Indeed, it is likely that in
general, neither the investors nor the fi nancial managers that directed the funds’
investments knew much about the fundamentals of agricultural commodity
markets. It is unclear to what extent the effect these new investor interests had on
prices and the underlying supply and demand relationships for agricultural
products. However, computerized trend-following trading practices employed by
many of these funds may have increased the short-term volatility of agricultural
prices
The U.S. Energy Policy Act of 2005 mandated that renewable fuel use in
gasoline reach 7.5 billion gallons by calendar year 2012. Additionally, the
legislation did not provide liability protection for effects of methyl tertiary butyl
ether (MTBE), an oxygenating gasoline additive that has been found to
74 Ronald Trostle
contaminate drinking water. As a result, blenders sharply reduced use of MTBE

by May 2006 and switched to ethanol as a fuel additive.[2]
Adverse weather reduced crop production in some countries in 2006. Russia
and Ukraine had yield losses due to drought. Australia was in the second year of a
severe drought. South Africa also experienced drought. These droughts resulted in
lower world production of grains and oilseeds, contributed to a further decline in
the global stock-to-use ratio for aggregate grains and oilseeds, and contributed to
rising prices. In September 2006, corn prices began a signifi cant rise to a new
high.
Developments in 2007
In 2007, a number of adverse weather events affected yields across the globe,
including:
• Northern Europe had a dry spring and harvest-time fl oods.

• Southeast Europe experienced a drought.
• Ukraine and Russia experienced a second year of drought.
• A large area of the U.S. hard red winter wheat area had a late, hard,
multi-day freeze that killed some of the crop and reduced yields over
large areas.
• Canada’s summer growing season was hot and dry, resulting in lower
yields for wheat, barley, and rapeseed.
• Northwest Africa experienced a drought in some of its major wheat- and
barley-growing areas.
• Turkey had a drought that reduced yields in its nonirrigated production
areas.
• Australia was in the third year of the worst multiyear drought in a
century. Grain yields were very low and exports plummeted.
• Argentina had a late freeze followed by drought that reduced corn and
barley yields.
The result of adverse weather in 2007 was a second consecutive drop in

global average yields for grains and oilseeds (fi g. 22). In historical perspective,
two sequential years of lower global yields occurred only three other times in the
last 37 years. The lower production caused yet another decline in the global
stocks-to-use ratio and created a world market environment characterized by
concern among importers about the future availability of supplies.

1
Total oilseeds = soybeans + rapeseed + sunflowers.
Figure 22. Total world grain and oilseeds.1 Production, yield, and area harvested.
In May of 2007, soybean prices began a rapid upward trend. Corn prices were
already at record highs.
By late summer 2007, some importers were aggressively contracting for
imports of grains and oilseeds. Even though prices were at record highs, importers
were buying larger volumes, not less. Some countries that usually imported suffi
cient quantities of grain to meet their needs for the following 3-4 months began to
contract for imports to meet their needs for the following 5-10 months.
Large foreign exchange reserves held by some major importing countries
enabled them to contract for their import needs regardless of how high the world
price rose. There have been very large accumulations of foreign exchange
reserves held by oil-exporting countries (OPEC and Russia) and by countries with
large non-oil trade surpluses (China, Japan, and other Asian countries). Countries
holding these large foreign exchange reserves are able to import large volumes of
food commodities in order to meet their consumption needs and allay their
domestic food price infl ation. In essence, they can bid supplies away from other
traditional importers that do not hold signifi cant foreign exchange reserves.
In August 2007, world wheat prices began a sharp upward trend. Rice prices
jumped sharply later in the fall.
76 Ronald Trostle
Source: Oxford Economics / Haver Analytics

Figure 23. Foreign exchange reserves.
POLICY RESPONSES TO RISING FOOD PRICES

The rapidly increasing world prices for food grains, feed grains, oilseeds, and
vegetable oils caused domestic food prices at the consumer level to rise in many
countries. In response to rising food prices, some countries began to take
protective policy measures designed to reduce the impact of rising world food
commodity prices on their own consumers. However, such measures typically
force greater adjustments and higher prices onto global markets. In the fall of
2007, some exporting countries made policy changes designed to discourage
exports so as to keep domestic production within the country. The objective was
to increase domestic food supplies and restrain increases in food prices. A partial
list of these policy changes follows:
Eliminated export subsidies:
• China eliminated rebates on value-added taxes on exported grains and

grain products. The rebate was effectively an export subsidy that was
eliminated.
Export taxes:
• China, with food prices still rising after eliminating the value-added tax
rebate, imposed an export tax on a similar list of grains and products.
• Argentina raised export taxes on wheat, corn, soybeans, soybean meal,
and soybean oil.
• Russia and Kazakhstan raised export taxes on wheat.
• Malaysia and Indonesia imposed export taxes on palm oil.
Export quantitative restrictions:
• Argentina restricted the volume of wheat that could be exported even

before raising export taxes on grains.
• Ukraine established quantitative restrictions on wheat exports.
• India and Vietnam put quantitative restrictions on rice exports.
Export bans:
• Ukraine, Serbia, and India banned wheat exports.

• Egypt, Cambodia, Vietnam, and Indonesia banned rice exports. India, the
world’s third largest rice exporter, banned exports of rice other than
basmati, signifi cantly reducing global exportable supplies.
• Kazakhstan banned exports of oilseeds and vegetable oils.
Early in 2008, importing countries also began to take protective policy

measures to combat rising food prices. Their objective was to make highcost
imports available to consumers at lower prices. A partial list of policy changes
follows:
The following countries reduced import tariffs:
• India (wheat fl our)

• Indonesia (soybeans and wheat; streamlined the process for importing
wheat fl our)
• Serbia (wheat)
• Thailand (pork)
• EU (grains)
• Korea and Mongolia (various food commodities)
78 Ronald Trostle
Subsidizing consumers:
• Some countries, including Morocco and Venezuela, buy food

commodities at high world prices and subsidize their distribution to
consumers.
Other decisions by importers:
• Iran imported corn from the United States, something that has occurred
rarely—only when they could not procure corn elsewhere at reasonable
prices.
The policies adopted by importing countries also changed price relationships

in world markets. Their policy changes increased the global demand for food
commodities even when world prices were already rapidly escalating.
The policies adopted by exporting countries to reduce food price infl ation
within their own countries resulted in lower supplies available to the rest of the
world. Importers who want to buy food commodities now have fewer sources.
This heightened concerns among importing countries, stimulating them to buy
additional supplies, even at record high prices. The combination of reduced
supplies and increased demand meant that world market adjustments had to be
made by the smaller number of countries trading in the world market that had not
changed their trade policies.
The combination of reduced supplies from traditional exporters and increased
demand from importers, at a time when the global stocks-to-use ratio was
unusually low, increased importers’ concerns about future availabilities to meet
consumption needs. This boosted world market prices even more. These
contributions to higher world prices in April 2008 exacerbated an already tight
supply and demand situation.
IMPLICATIONS FOR FOOD SECURITY

Rising food commodity prices tend to negatively affect lower income
consumers more than higher income consumers. First, lower income consumers
spend a larger share of their income on food. Second, staple food commodities
such as corn, wheat, rice, and soybeans account for a larger share of food
expenditures in low-income families. Third, consumers in low-income, food-defi
cit countries are vulnerable because they must rely on imported supplies, usually
purchased at higher world prices. Fourth, countries receiving food aid donations
based on fi xed budgets receive smaller quantities of food aid.
A number of factors affect how much of an increase in world food
commodity prices passes through to consumers’ budgets: the percentage of
income spent on food, the percentage of retail food expenditures spent on staple
foods, government trade and domestic food policies. A simplifi ed comparison of
the impact of higher food commodity prices on consumers in high-income
countries and on consumers in low-income, food-defi cit countries illustrates these
differences.
Impact of Higher Food Commodity Prices On Consumers’ Food Budgets*
High-income Low-income food-

countries defi cit countries
I. Base scenario
Income $40,000 $800
Food expenditure $4,000 $400
Food costs as % of income 10.0% 50%
Disaggregate retail food spending (staples vs. non-
staples)
Staples as % of total food spending 20% 70%
Expenditures on staples $800 $280

Expenditures on non-staples $3,200 $120
II. Scenario: 50% price increase in staples, partial
pass through on staples
Assumed % pass through 60% 60%
Increase in cost of staples $240 $84
New cost of staples $1040 $364
New total food costs $4,240 $484
Food costs as % of income 10.6% 60.5%
*These are illustrative food budgets that characterize the situations for consumers in high-
and low-income countries.
Source: As compiled by ERS.
This illustrative comparison shows that for a consumer in a high-income

country, a 50-percent increase in staple food prices causes retail food expenditures
to rise 6 percent ($240). This results in the percentage of income spent on food
rising from 10 to 10.6 percent—less than 1 percentage point. For a consumer in a
typical low-income food-defi cit country, food expenditures increase only $84,
but that is a 21-percent increase in total food expenditures. Furthermore, this $84
80 Ronald Trostle
increase means that the percentage of income spent on food climbs from 50 to
more than 60 percent.
For highly import-dependent or highly food-insecure countries, any decline in
import capacity stemming from rising food prices can have challenging food
security implications. Foreign food aid donations have provided supplemental
assistance to lower income consumers in many low-income, fooddefi cit
countries. However, food aid donations have stagnated during the last two
decades, and food aid’s share has declined relative to total food imports of low-
income countries.[3] Higher food commodity prices negatively affect the ability
to provide food aid donations. Most food-aid donors budget a fi xed annual
amount to fund procurement of food aid commodities. When prices rise, their fi
xed budget buys less food to donate. Additionally, higher petroleum prices have
been a major factor in the sharp increase in ocean freight rates. This further
increases the cost of getting food aid donations to the recipient countries.
FOOD PRICE INFL ATION IMPACT ON SOCIAL UNREST

The recent price spike has led to social unrest in a number of countries.[4]
Peaceful protests have been held in Malaysia (millers & bakers), Indonesia
(markets selling soybeans and meats), and Pakistan (wheat marketers). Peruvian
farmers blocked rail lines to protest rising fertilizer costs. In South Africa,
members of the National Labor Federation demonstrated against higher food and
electricity prices.
Less peaceful demonstrations of consumers’ anger and fear over higher food
prices (generally referred to in the news media as riots) have occurred in a variety
of countries including:
Guinea Mauritania Morocco Senegal

Cameroon Mexico Uzbekistan Yemen
Niger Burkina Faso Egypt Haiti
Ethiopia Philippines Thailand Mozambique
Ivory Coast Bangladesh Indonesia
Most of these incidents have occurred in low-income, food-defi cit countries.
SUMMARY OF FACTORS CONTRIBUTING

TO HIGHER FOOD PRICES
Food prices, and particularly the prices for basic food commodities, have
risen sharply during the last 2 years. Many factors contributed to these price
increases. Long-term trends that led to slower growth in production and rapid
growth in demand contributed to a sharp downward trend in world aggregate
stocks of grains and oilseeds that began in 1999. Recent factors that have further
tightened world markets include increased global demand for biofuels feedstocks
and adverse weather conditions in 2006 and 2007 in some major grain- and
oilseed-producing areas.
Additional recent developments that have put upward pressure on food
commodity prices by further restricting available supplies or increasing demand
for food commodities include the devaluation of the U.S. dollar, rising energy
prices, increases in agricultural costs of production, growth in foreign exchange
holdings by major food-importing countries, and protective policies adopted by
some exporting and importing countries.
As a result of these market factors, stocks of grains and oilseeds in the world
have fallen to levels that make the global aggregate stock-to-use ratio for grains
and annual oilseeds the lowest since 1970. Stocks in major exporting countries are
particularly low. All of these factors have contributed to higher world prices for
food commodities.
PROSPECTS FOR THE FUTURE

In assessing prospects for the future, there are a number of uncertainties and
concerns:
• Global economic growth: If rapid growth continues, particularly in

developing countries, it will continue to put upward pressure on food
commodity prices through increases in food demand.
• Energy prices: If petroleum prices continue to rise, costs of agricultural
production will rise, as will the cost of processing, and the cost of
transporting products to markets both within a country and exporting to
other countries. Continued high petroleum prices will also sustain the
global incentives to produce more biofuels.
82 Ronald Trostle
• Biofuels production: Global growth in grains- and oilseeds-based biofuels

production is expected to slow in the next several years from the rapid
gains of the past several years, even with the higher mandates in the
United States under the Energy Independence and Security Act of 2007.
This will lessen further demand pressures on agricultural markets and
likely will result in some reductions in grain and oilseed prices.
Nonetheless, with sustained higher levels of biofuels-related demand,
world food commodity prices are not projected to retreat to past levels.
However, several years into the future, the underlying long-term trend in
rapidly increasing global demand is expected once again to be the
primary contributor to future upward pressure on food commodity prices.
Supply response capacity of the global agricultural production system:
• Cost of inputs: Continued increases in production costs, especially in

energy-related costs, will restrain the world’s production response.
Higher costs for fertilizer, fuel, and seeds could cause farmers without
access to credit to plant less than they otherwise would have, or to shift to
crops requiring fewer inputs.
• Additional cropland (quantity and quality): What will be the longrun
impact of higher world food commodity prices on the amount of land

used to produce the crops? What is the productivity of the land that will
be used to increase production?
• Water shortages: How quickly will constraints on the amount of water
available for agricultural production become more widespread?
• New seed varieties and use of biotechnology: Will higher food prices
encourage some countries to adopt the use of biotechnology, especially
genetically modifi ed seed for crops? Will future research focus more on
yield-enhancing varieties rather than cost-reducing innovations?
• Biophysical response to climate change: How will climate change affect
agricultural production? How will it change temperatures, precipitation,
the length of growing seasons, and variability of yields? How, and under
what circumstances, will climate change increase and/or reduce
production? In affected regions, how diffi cult will it be for producers to
shift to different crops, to adopt new cropping patterns, and to adjust
production practices to the new environment?
With such low world stocks of food commodities, food prices are vulnerable
to a production shortfall in one or more major production areas. If a significant
shortfall occurs this year due to weather or disease, food prices might continue to
rise sharply from the current high level. Although trade fl ows can mitigate some
of these effects, new or existing trade restrictions or barriers can exacerbate price
impacts. However, if good crop production conditions exist in the Northern
Hemisphere during the next 6 months, food commodity prices could retreat signifi
cantly from their current highs.
REFERENCES
[1] USDA’s 10-year agricultural projections are a Departmental consensus on a
longrun scenario for the agricultural sector. The projections are not a USDA
forecast of what the future will be, but instead are a description of what
would be expected to happen with a continuation of current farm legislation
and under very specifi c assumptions regarding the macroeconomy, trade
policies, weather, and international developments. The projections provide a
neutral backdrop, reference scenario that provides a point of departure for
discussion of alternative farm sector outcomes that could result under
different domestic or international assumptions. The projections referred to
in this report were prepared in October through December 2007 and refl ect
a composite of model results and judgment-based analyses. See the

documentation of the baseline process at http://www.ers.usda.gov/Briefi
ng/Baseline/.
[2] Paul Westcott, “U.S. Ethanol Expansion Driving Changes Throughout the
Agricultural Sector,” Amber Waves, U.S. Department of Agriculture,
Economic Research Service, September, 2007.
[3] Stacey Rosen and Shahla Shapouri, “Rising Food Prices Intensify Food
Insecurity in Developing Countries,” Amber Waves, U.S. Department of
Agriculture: Economic Research Service, February 2008.
[4] Incidents gleaned from news media reports.
Chapter 3
BIOFUELS, INTERNATIONAL
FOOD PRICES, AND THE POOR 1
Joachim von Braun
Testimony to the United States Senate Committee on Energy and Natural

Resources, Full Committee's hearing on Thursday, June 12, 2008 at 2:15 p.m.
in Room 366 of the Dirksen Senate Office Building in Washington, D.C.;

On the relationship between the United States' renewable
fuels policy and food prices
INTRODUCTION
World agriculture is at a turning point: economic growth, energy needs, and
climate change redefine the equations of agricultural supply and demand and
contribute to accelerate food prices. Biofuels have been particularly high on the
global agenda largely due to rising concerns about national energy security, high
energy prices, and global climate change, as well as the income expectations of
farmers and other investors (von Braun and Pachauri 2006).
The International Grain Council reports an overall growth in the use of cereals
by 32% in 2007/8 and an estimated 31% in the coming year, and by 41% and
1
This is an edited, excerpted and augmented edition of a International Food Policy Research
Institute publication.
86 Joachim von Braun
32% in the USA respectively (see table 1). The USA has a share of about 80% in
the total quantity. The total quantity used globally this year (95 Mill. Tons) is
large, relative to total world trade of corn (100 Mill. Tons) and relative to total
world corn production (777 Mill. Tons).
The rapid expansion of ethanol and biodiesel has increased dependency on
natural vegetation and crops grown specifically for energy. Biofuel production
has also introduced new food- security risks and new challenges for the poor,
particularly when resource constraints have lead to trade-offs between food and
biofuel production and rising food prices. For the further development and use of
biofuels, it is necessary to carefully assess the impact of different technologies,
products (ethanol, bio-diesel, bio-gas), and feed stocks (e.g. sugar cane, corn,
oilseeds, palm oil, agricultural waste and biomass).
Table 1. Utilization of Cereals for Ethanol production (2004/05 - 200 8/09)
2004/ 2005/ 2006/ 2007/ 2008/ 2007/ 2008/

05 06 07 081) 092) 08:06/07 09:07/08
in Million Tons change in % change in %
USA All 34,1 41,3 54,5 76,8 101,7 + 40,9 + 32,4
Corn 33,6 40,7 53,8 76,2 100,4 + 41,6 + 31,8
Sorghum 0,5 0,6 0,7 0,6 1,3 - 14,3 + 116,7
EU-27 1,1 3,2 3,4 2,9 5,2 - 14,7 + 79,3

Canada 0,5 0,7 1,5 1,8 2,5 + 20,0 + 38,9
China 6,5 9,5 11,0 11,5 12,0 + 4,5 + 4,3
Other
0,8 1,1 1,4 1,9 2,4 + 35,7 + 26,3
countries
Total 43,0 55,8 71,8 94,9 123,8 + 32,2 + 30,5
1) estimate, 2) projection
Source: International Grain Council, June 2008.
ENERGY AND AGRICULTURE IN A

BROADER CONCEPTUAL FRAMEWORK
A comprehensive policy framework will be fundamental to developing
biofuels in such a way that they contribute to energy security, climate change
mitigation, and environmental sustainability, and at the same time they do not
negatively affect food prices and the food security of the poor. The three main
Biofuels, International Food Prices, and the Poor 87
domains upon which biofuels have an impact—namely the political/social, the

economic, and the environmental—interact when agriculture and energy become
more closely linked through the production of biofuels (Figure 1). This interaction
will lead to changes in the dynamics of agriculture as well as changes in the impact
on households, businesses, and the private sector.
Participants in the biofuel discussion come from many sectors and include
farmer representatives, the energy industry, global environmental movements,
large capital funds, and science and technology lobbies. The extent to which
biofuels remain on the agenda will depend on political pressures and security
concerns. High levels of rent seeking as well as political lobbying are part of the
picture, and their impact can be seen in the current subsidy and trade policies
adopted by some countries. The implemented biofuel subsidies are regressive and
anti- poor because low-income households lose much on the food consumption side
if food prices rise, and gain little on the energy side if energy prices decline.
Source: Devised by author.
Figure 1. Energy-agriculture linkages within a broader conceptual framework.
The quantities of biofuels required to meet energy needs vary between

countries and depend on the choice of feedstock. For example, if 20 percent of
the maize crop in the United States were to be used for ethanol production, it
would meet only one-third of the country’s 10-percent ethanol blending target. On
the other hand, if 20 percent of the sorghum crop in India were to be replaced with
sweet sorghum, it would be sufficient to meet India’s entire 10-percent ethanol
blending target (Winslow 2008). Less-known crops such as Jatropha curcas and
sweet sorghum also represent an area of opportunity for using marginalized lands
and reducing greenhouse gases.
Whether biofuel production is a viable and sustainable source of energy depends
not only on the choice of feedstock, but also on cultivation practices, technologies
employed, or the security, trade, and environmental policies that are adopted.
Many countries have already established ambitious biofuel expansion plans and
blending targets, and yet biofuel production remains uncompetitive in many
places of the world. Since second-generation biofuel technologies, which may
lessen the food–fuel competition and the negative effects on the poor, are still a
long way away, it makes sense for many countries to wait for the emergence
of these technologies and “leapfrog” onto them later.
However, it is also important to recognize that technology may not
necessarily overcome the food–fuel competition. The trade-offs between food and
fuel may actually be accelerated when biofuels become more competitive relative
to food with a further increased demand as a consequence. Therefore, it is not a
question of either or: It is essential to simultaneously invest in energy and other
agricultural technologies to soften the trade-offs. The Consultative Group on
International Agricultural Research (CGIAR) can play a vital role in this process.
BIOFUELS AND RISING FOOD PRICES

Feedstock makes up the principal share of total biofuel production costs. It
accounts for 50–70 percent and 70–80 percent of overall costs for ethanol and
biodiesel, respectively (IEA 2004). Net production costs, which refer to all costs
related to production (including investments), differ widely across countries. For
instance, Brazil produces ethanol at about half the cost of Australia and one-third
the cost of Germany. However, feedstock costs have increased by 50 percent and
more during the past few years, impinging on comparative advantage and
competitiveness. While the biofuel sector will contribute to price changes, it will
also be a victim of changes in feedstock prices.
The high price of energy is a key factor behind rising food prices. Energy and
agricultural prices have become increasingly intertwined. With oil prices at an
all-time high and the U.S. government subsidizing farmers to grow crops for
energy, U.S. farmers have massively shifted their cultivation toward biofuel
feedstocks, especially corn (see Table 1), often at the expense of soybean and wheat
cultivation.
An IFPRI study by Mark Rosegrant (2008) did a comparison between a
simulation of actual demand for food crops as biofuel feedstock through 2007 and a
scenario simulating biofuel growth at the rate of 1990-2000 before the rapid
takeoff in demand for bioethanol. This approximates the contribution of biofuel
demand to increases in grain prices from 2000 to 2007. The percentage
contribution of biofuel demand to price increases during that period is the
difference between 2007 prices in the two scenarios, divided by the increase in
prices in the baseline from 2000 to 2007. The increased biofuel demand during the
period, compared with previous historical rates of growth, is estimated to have
accounted for 30 percent of the increase in weighted average grain prices. The
biggest impact was on maize prices, for which increased biofuel demand is
estimated to account for 39 percent of the increase in real prices. Increased biofuel
demand is estimated to account for 21 percent of the increase in rice prices and
22 percent of the rise in wheat prices (Rosegrant 2008).
Scenario analyses undertaken with IFPRI’s International Model for Policy

Analysis of Agricultural Commodities and Trade (IMPACT have examined the
effects of biofuels on food prices as they may occur in the future. The developed
scenarios include:
Scenario 1 — based on the actual biofuel plans of countries and biofuel
expansion for identified high-potential countries. Under this scenario prices increase
ceteris paribus by 18 percent for oilseeds and 26 percent for corn by 2020.
Scenario 2 — based on a more drastic expansion of biofuels, assuming a doubling
of the production expansion rate over Scenario 1 levels. Under this drastic biofuel
expansion scenario (Scenario 2), the price of corn rises by 72 percent and of
oilseeds by 44 percent.
WOULD THE POOR GO EVEN HUNGRIER

WITH MORE BIOFUEL PRODUCTION?
Poor people are impacted by biofuels as consumers in food and energy

markets, producers of agricultural commodities in small businesses, and workers
in labor markets. The increase in agricultural demand and the resulting increase in
agricultural prices will affect poor people in different ways. Some poor farmers
could gain from this price increase. However, net buyers of food, which represent
the majority of poor people, would respond to high food prices with reduced
consumption and changed patterns of demand, leading to calorie and nutrition
deficiencies.
Under the two IMPACT scenarios, the increase in crop prices resulting from
expanded biofuel production is also accompanied by a net decrease in availability
and access to food. Calorie
consumption is estimated to decrease across regions under all scenarios
compared to baseline levels (Figure 2). Food-calorie consumption will fall the
most in Sub-Saharan Africa, where calorie consumption is projected to decrease
by more than 8 percent if biofuels expand drastically.
Source: IFPRI IMPACT Model projections.
Figure 2. Calorie availability changes in 2020 compared to baseline (%).
As a result of rising food prices, cuts will likely be made to food

expenditures, exacerbating diet quality and micronutrient malnutrition. A study
of the effects in an East Asian setting suggests that a 50-percent increase in the
price of food, holding income constant, will lead to the decline of iron intake by
30 percent. As a result, the prevalence of micronutrient deficiency among
women and children will increase by 25 percent (Bouis 2008). Studies also show
that current malnutrition of mothers and children has long lasting effects (Lancet
2008) and will show in deteriorated health and income decades later.
IMPLICATIONS FOR POLICY

A comprehensive policy framework will be fundamental to developing
biofuels in such a way that they contribute to energy security, are environmentally
sustainable and that complementary policies protect the pro-poor as long as grain
based biofuels contribute to high food prices. Such a framework requires a
strategic approach with three pillars:
1 Science and technology policy , which calls for accelerated

agricultural productivity to maintain and improve food security,
accompanied by an expanded focus on agricultural and biofuel
technologies and close coordination with biofuel users—for example, the
automobile industry.
2 Markets and trade policy , which calls for building a global system for
biofuel markets and trade that is undistorted and operates with low
transaction costs. Transparent standards are needed, including
sustainability and performance-based standards rather than technology-
based standards that will quickly become outdated.
3 An insurance and social-protection policy for the food-insecure poor,
which is a necessity given existing large-scale food and nutrition
insecurity and the growing number of changes in the food system which
are partly driven by the expansion of biofuels. Such protection could
include employment programs, school feeding and food for schooling
programs, conditional and unconditional cash transfer programs, and social
security systems for the poorest.
REFERENCES
Bouis, H. 2008. Rising food prices will result in severe declines in mineral
and vitamin intakes of the poor. Washington, D.C.: HarvestPlus. (mimeo)
IEA (International Energy Agency). 2004. Biofuels for Transport: An International
Perspective. Paris. Rosegrant, M. W. 2008. Biofuels and Grain Prices: Impacts
and Policy Responses. Testimony for the U.S. Senate Committee on
Homeland Security and Governmental Affairs. Washington, D.C. von Braun,
J. 2007. The world food situation – new driving forces and required actions.
Food Policy Report. Washington D.C.: International Food Policy Research
Institute.
von Braun, J. and R. K. Pachauri. 2006. The Promises and Challenges of Biofuels
for the Poor in Developing Countries. Washington D.C.: International Food
Policy Research Institute.
Winslow M. 2008. Sweet sorghum status, issues, and opportunities. Discussion
Paper. Patancheru, India: International Crops Research Institute for the Semi-
Arid Tropics (ICRISAT).
Chapter 4
FOOD PRICE INFLATION:

CAUSES AND IMPACTS*
Tom Capehart and Joe Richardson
ABSTRACT
U.S. food prices rose 4% in 2007 and are expected to gain 3.5% to 4.5% in
2008. Higher farm commodity prices and energy costs are the leading
factors behind higher food prices. Farm commodity prices have surged
because
(1) demand for corn for ethanol is competing with food and feed for
acreage;
(2) global food grain and oilseed supplies are low due to poor harvests;
(3) the weak dollar has increased U.S. exports;
(4) rising incomes in large, rapidly emerging economies have
changed eating habits; and
(5) input costs have increased. Higher energy costs increase transportation,
processing, and retail costs.
Although the cost of commodities such as corn or wheat are a small part of the
final retail price of most food products, they have risen enough to have an
impact on retail prices. Generally, price changes at the farm level have a
diminished impact on retail prices, especially for highly processed products.
*
This is an edited, excerpted and augmented edition of a CRS Report RS22859, dated April 10,
2008.
94 Tom Capehart and Joe Richardson
The impact of higher food prices on U.S. households varies according to

income. Lower-income households spend a greater portion of their income on food
and feel price hikes more acutely than high-income families. Higher food costs
impact domestic food assistance efforts in numerous ways depending on
whether benefits are indexed, enrollments are limited, or additional funds are
made available. Higher food and transportation costs also reduce the impact
of U.S. contributions of food aid under current budget constraints.
INTRODUCTION
U.S. food prices are increasing. According to USDA, the Consumer Price
Index (CPI) for “all food” increased 4% in 2007, the largest annual jump since
1990. In 2008, this trend is expected to continue: the “all food” CPI is forecast to
increase 3.5% to 4.5%.[1] This rapid inflation follows an extended period of stable
food prices. From 1987 through 2007, food prices increased an average of 2.7% per
year, excluding the drought years of 1989 and 1990.[2] During 2005 and 2006, food
prices rose 2.4%. This report examines the cause of food price increases and
evaluates their impacts on U.S. consumers.
KEY FACTORS BEHIND HIGHER COMMODITY PRICES

Robust Domestic Demand
Corn, soybean, and wheat prices all reached 10-year highs during the 2006-
2007 crop year. High prices for corn reflected increased use for ethanol (22% of the
2007 crop) and strong exports. High corn prices in turn encouraged growers to move
acres from wheat and soybeans into corn, contributing to tight supplies and higher
prices for those crops. U.S. farm prices in 2007 for corn are estimated at $3.75 to
$4.00 per bushel, compared with $2.00 in 2005; soybean prices are estimated at
$10.00 to $10.80 per bushel, up from $5.66 in 2005; and wheat prices are estimated
at $6.50 to $6.80 per bushel, up from $3.42 in 2005.[3]
Food Price Inflation: Causes and Impacts 95
Global Stocks Are at Low Levels
Globally, stocks of corn, wheat, and soybeans are at historically low levels.
Drought in Australia and Eastern Europe and poor weather in Canada, Western
Europe, and the Ukraine have reduced available quantities. With world stocks for
wheat at a 30-year low,[4] buyers are turning to the U.S. for supplies.
Global Consumption Patterns Are Changing
Higher incomes are boosting demand for processed foods and meat in
countries such as India and China. These shifts require more feed grains and
edible oil. Even in low-income countries of sub-Saharan Africa, Asia, and Latin
America, the vegetable oil share of diets has risen as processed food consumption
rises. In China, consumption of meats, other livestock products, and fruits has
increased while consumption of grain-based foods (such as bread) has slipped.[5]
Improving food distribution systems are altering Chinese food preferences by
introducing non-local foods. In India, per capita consumption of grains has fallen, while
that of animal products, edible oils, vegetables and fruits has increased.[6] Better food
distribution systems are altering Chinese food preferences by introducing non-local
foods.
Weak Dollar Boosts Demand for U.S. Exports
As the dollar depreciates against foreign currencies, U.S. exports become more
competitive, boosting demand and prices. The dollar, adjusted for relative inflation
rates, is expected to depreciate 7% against the euro, 6% against the Chinese yuan,
and 8% against the Brazilian real in 2008.[7] The exchange rate is an important
determinant of agricultural trade. The depreciation of the U.S. dollar since 2002
has helped improve U.S. agricultural export performance. According to the U.S.
Department of Agriculture’s (USDA’s) Economic Research Service (ERS), the dollar is
forecast to be up 2% versus the yen, unchanged against the Canadian dollar, down 2%
against the Mexican peso, and down 6% against the Argentine peso in 2008.
HOW DO HIGHER COMMODITY

PRICES IMPACT CONSUMERS?
As commodity prices rise, food prices follow, but to a lesser extent. On
average, about 20 cents of each dollar spent on food is the farm share — the retail
cost less the value-added after the product leaves the farm and moves along the
marketing chain to the retail outlet.[8] In less processed foods, the farm component
of the final product is larger and changes in the farm price have a greater impact at
the retail level. For instance, eggs, and fresh fruits and vegetables undergo minimal
processing after they leave the farm — they are consumed in essentially their
original form. The retail value of such products tends to have a large farm
component and changes at the farm level have a greater impact on the consumer. On
the other hand, in highly processed products, such as breakfast cereal, the corn,
wheat, or rice used is completely transformed and the final product bears little
resemblance to the original commodity. An 18-ounce box of corn flakes contained
about 3.3 cents worth of corn in 2006.[9] Higher corn prices in 2007 increased the
corn share to 4.9 cents. This is a small part of the retail value of a box of corn
flakes. Most of the retail price represents packaging, processing, advertising,
transportation, profit, and other costs.
ENERGY COSTS
Energy costs affect all levels of the food production sector. Recent record crude
oil prices in excess of $110 per barrel affect costs throughout the marketing
chain.[10] Producers spend more for fertilizer (for which natural gas is a major
input), crop drying, and transportation — raising production costs. At the
processing, wholesale, and retail levels, the cost of transportation and operating
packing houses, manufacturing plants, and retail stores has increased. Some of these
costs are passed on to consumers in the form of higher prices. In addition, high
petroleum prices increase the competitiveness of ethanol, further boosting
demand for corn.
FOOD PRICE CHANGES VARY BY FOOD TYPE

Meat, Poultry, Dairy, and Eggs
The CPI for all meats advanced 3.3% during 2007.[11] Beef increased 4.4%,
pork 2%, broilers 5.2%, and eggs 29.2%, and dairy products advanced 7.4% in 2007.
The farm share of these products is large compared with other foods, so changes at
the farm level are passed, to a greater extent, to the consumer. In many cases,
higher feed and energy costs were behind these increases. Strong export demand —
spurred by the weak dollar — and reduced flocks played a role in the price hikes for
poultry and eggs. The CPI for meats is forecast to increase by 1.5% to 2.5% in 2008.
Compared with other food categories, these high-value items also account for a
large share (11.1%) of the average consumer’s food budget.
Fruits and Vegetables
Prices for fruits and vegetables gained 3.8% in 2007 and are forecast to
increase 3% to 4% in 2008. Production shortfalls affected some varieties, especially
bananas, the largest by volume. Supplies of oranges were strong, offsetting other
declines. Energy costs were a large factor in higher fruit and vegetable price
increases. Fruits and vegetables account for 8.4 cents of the consumer food dollar.
Cereals and Bakery Products
The CPI for these items advanced 4.4% in 2007 and is projected to rise 6.5%
to 7.5% next year. Tight global wheat supplies and acreage reductions to promote
ethanol production have caused a spike in wheat prices. However shifts in wheat
prices have a relatively small impact on grocery store prices because the farm share
of these products is small. Prices for these product are affected more by marketing
factors such as transportation, labor, and energy costs than the cost of basic inputs.
Oilseeds and Related Products
Low stocks and strong export demand for soybeans are reflected in the CPI
for these products, which gained 2.9% in 2007. While much of this category is
supplied by soybeans, substitutes exist and will help moderate increases. In 2008, the
CPI is set to rise 7% to 8% due to continued strong export demand from countries
where changing diets require more vegetable oil.
IMPACT ON LOW-INCOME HOUSEHOLDS

Although U.S. consumers generally spend a smaller share of their income on food
compared with many other countries, that share varies widely across income
levels. Overall, U.S. households spend 12.6% of their income on food,[12] so
changes in the price of food have to be large to affect their total budget.
However, the picture is vastly different for low-income households. In 2006,
households with incomes in the lowest reported income category spent 17.1% of their
income on food. Households with incomes greater than $70,000 spent 11.3% of
their income on food. When food prices rise, families with lower incomes feel
the pinch more acutely since food expenditures make up a larger share of their
total expenditures. Also, higher-income families can shift food consumption to the
home from restaurants, saving money without reducing consumption. A 4% to 5%
increase in food expenditures has a significant impact on purchasing power for low-
income families.
FEDERAL SPENDING FOR DOMESTIC

FOOD ASSISTANCE PROGRAMS
Food price inflation increases spending on domestic assistance efforts.
Increasing prices encourage those who are eligible but not participating to enroll.
Increasing prices translate directly into benefit payments and per-meal subsidies
for entitlement programs in which benefits are indexed to food-price inflation
(e.g., food stamps, school meal programs). Increasing prices place pressure on
appropriators to provide more funding to support caseloads for discretionary
programs like the Special Supplemental Nutrition Program for Women, Infants,
and Children (the WIC program).
Food Stamps
The Food Stamp program is the largest of the federally supported domestic
food assistance programs. Its benefits are indexed annually for changes in the cost
of USDA’s least costly food plan, the “Thrifty Food Plan” (TFP). For a number of
years and well into 2006, annual increases in the TFP typically ranged between 1.5%
and 2.5%, with a few exceptions. However, starting in late 2006, food prices (as
reflected in the cost of items in the TFP) began to increase at a faster rate. The last
benefit increase, effective October 2007, was 4.6%. As a result, the average
monthly benefit will be $6 per person higher in FY2008.
The impact of benefit increases on food stamp costs also depends on
participation. For FY2008, the benefit increase noted above (combined with
estimated growth in enrollment) yields a likely $2 billion cost attributable to
adjustments for food price increases (out of total spending of $36.7 billion), about
double the $1 billion that would have occurred based on pre-2007 price increases.
Costs are expected to increase even more in FY2009.
Child Nutrition
Federal payments for lunches and breakfasts served to children in

participating school meal programs are the second largest federal commitment to
domestic food assistance, about $11 billion per year. These per-meal subsidies —
now ranging as high as $2.83 a meal, including the value of USDA commodity
donations — are indexed every July to food-price changes reflected in the “Food Away
From Home” component of the CPI over the 12-month period ending each May.
Indexed maximum subsidy rates (those paid for the majority of school meals that are
served free or at a reduced price to children from lower-income families) have
increased by some 25 cents a meal between the 2005-2006 school year and the current
2007-2008 school year. The annual increase in subsidies has gone from 2.9% for
the 2005-2006 school year to 3.3% for the 2007-2008 school year, increasing federal
support by about $300 million above spending if earlier food price increases had
prevailed. According to ERS, this trend is expected to continue into FY2009.
The WIC Program
Unlike food stamps and child nutrition programs, the WIC program is
discretionary. Spending depends on annual appropriations, based largely on estimates
of participation and the cost of the food packages that are purchased with WIC
vouchers. The value of benefits is not indexed, per se. Rather, WIC vouchers
are redeemable at whatever the participating retailer charges for the items
covered by the vouchers, which differ according to the type of recipient (e.g.,
pregnant mother, infant, child). As a result, the cost of WIC vouchers reflect food
price changes without the time lag built into other nutrition programs like food
stamps. Just as important, WIC vouchers are highly specific as to the food items
they cover and have a relatively heavy emphasis on certain types of food — dairy
items and infant formula being a major component.
In recent years, the cost of WIC food vouchers has varied a great deal, largely
because of changes in dairy-related food prices. The average per-participant monthly
cost of vouchers has ranged from $34.80 in FY2002 to $39.15 in FY2007.
However the annual percentage increase has been very small for some years (1% or
less for FY2003, FY2005, and FY2006) and more substantial for other years (6.6%
for FY2004 and 5.6% for FY2007). Most recently, monthly per-participant
WIC food costs averaged $42.50 for the first three months of FY2008. Given
this significant volatility, it is difficult to produce specific estimates of the effect of
food price inflation on WIC program costs. However, the ERS forecasts of increases
in egg and dairy product prices in the 2% to 4% range in 2008 indicate that relatively
high WIC food costs are likely in the near term.
FOREIGN FOOD AID

Higher commodity and food prices reduce our ability to provide food aid to other
countries without additional appropriations. Food aid usually takes the form of basic
food grains such as wheat, sorghum, and corn, and vegetable oil — commodities
critical to developing-country diets. Since there is very little value added for these
commodities, shifts in prices translate directly into higher prices for food-insecure
countries or reduced food aid contributions per dollar spent. Also, higher energy costs
have increased shipping costs for both food purchases and food aid. Unlike some
domestic nutrition programs, foreign food aid is not adjusted to account for
changing costs. After a long period of declining food costs, developing countries
are facing increased food import bills — for some countries as high as 25% in
2007.[13]
The U.S. Agency for International Development (USAID) has indicated that
rising food and fuel prices would result in a significant reduction in emergency
food aid. According to press reports in March 2008, USAID expects a $200 million
shortfall in funding to meet emergency food aid needs. For FY2008, Congress
appropriated $1.2 billion for P.L. 480 food aid, the same as FY2007. For FY2009,
the President’s budget again requested $1.2 billion. In six out of ten years since
1999, supplemental funding for P.L. 480 Title II food aid has been appropriated.
Last year, the U.N. World Food Program (WFP) estimated it would need $2.9
billion to cover 2008 food aid needs. Recent commodity, energy, and food cost
increases have boosted this estimate to $3.4 billion. According to the WFP, the
current price increases force the world’s poorest people to spend a larger
proportion of their income on food.
REFERENCES
[1] “Food CPI, Prices, and Expenditures Briefing Room,” U.S. Department of
Agriculture (USDA) Economic Research Service (ERS), at
[http://www.ers.usda.gov/Briefing/CPIFoodAnd
Expenditures/consumerpriceindex.htm].
[2] USDA/ERS, Amber Waves, “Corn Prices Near Record High,” by
Ephraim Leibtag, February 2008.
[3] U.S. Department of Agriculture, “World Agricultural Supply and
Demand Estimates,” March 11, 2008.

[4] For more information, see CRS Report RS22824, High Wheat Prices:
What are the Issues?
[5] Center for Agriculture and Rural Development, “Changing Diets in
China’s Cities: Empirical Fact or Urban Legend?” by Fexgzia Dong and
Frank H. Fuller, at [http://www.card.iastate.edu/ publications/ synopsis.
aspx?id=1 031].
[6] USDA/ERS, Amber Waves, “Rising Food Prices Intensify Food Insecurity
in Developing Countries,” by Stacy Rosen and Shahla Shapouri, February
2008.
[7] USDA/ERS, “Outlook for U.S. Agricultural Trade,” February 21, 2008.
[8] USDA/ERS, “Price Spreads from Farm to Consumer,” by Howard Elitzak, at
[http://www.
ers.usda.gov/Data/FarmToConsumer/Data/marketingbiltable1.htm].
[9] USDA/ERS, Amber Waves, “Corn Prices Near Record High,” by Ephriam
Leibtag, February 2008.
[10] West Texas Intermediate (WTI), a crude oil price traded at Cushing, OK,
reached $110 per barrel for the first time on March 13, 2008.
[11] Food CPI’s for 2007 and 2008 are from the USDA/ERS Food CPI, Prices, and
Expenditures Briefing Room, at [http://www.ers.usda.gov/briefing/
cpifoodand expenditures/].
[12] U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure
Survey, “Table 46, Income Before Taxes,” at [http://stats.bls.gov/cex/].
[13] USDA/ERS, Rising Food Prices Intensify Food Insecurity in
Developing Countries,” Amber Waves, February 2008.
Chapter 5
HIGH WHEAT PRICES:

WHAT ARE THE ISSUES?*
Randy Schnepf
ABSTRACT
The U.S. Department of Agriculture (USDA) projects the U.S. season-average

farm price (SAFP) received for all wheat in the 2007/08 marketing year
(June to May) to be in the $6.45 to $6.85 per bushel range. The range
midpoint exceeds the previous U.S. record of $4.5 5 (in 1995/96) by 46%. During
the past 30 years, the all-wheat SAFP has stayed within a range of $2.42 to
$4.55, while averaging $3.33 per bushel. USDA projects a replenishment of
U.S. and global supplies in 2008 (assuming normal weather conditions) to
moderate market prices in the latter half of 2008. However, prices are likely to
exhibit substantial variability until global stock levels can be rebuilt.
The initial impetus for rising prices over the past year has been a 30-year
low in global stocks following seven out of eight years in which global consumption
exceeded production. However, in recent months several other factors — including
reluctance of traditional exporters to make further supplies available to
international markets, strong international demand, the rapid growth in the
demand for grains and oilseeds as feedstock for biofuels production, and
USDA’s announcement that last fall’s winter- wheat plantings were less than
expected — have contributed to a sharp rise in cash and futures contract prices,
particularly for higher-protein wheat varieties.
*
This is an edited, excerpted and augmented edition of a CRS Report RS22824, dated February
29, 2008.
104 Randy Schnepf
BACKGROUND
Wheat is grown in almost every temperate-zone country of North America,
Europe, Asia, and South America. The largest wheat-producing countries are China,
India, the United States, Russia, Canada, and Australia. U.S. wheat production
accounts for about 9%-1 0% of world production; but the United States is the world’s
leading wheat exporter with roughly a 25% share of annual world trade. However, the
international wheat market is very competitive and foreign sales often hinge on
wheat variety and product characteristics as well as price.[1]
U.S. wheat is produced as both a winter and a spring crop.[2] The United
States produces all six of the world’s major wheat classes — hard red winter (HRW),
hard red spring (HRS), soft red winter (SRW), hard white, soft white, and durum.
Hard wheats generally contain higher protein levels — a desirable trait for bread
making, while softer wheats may be preferable for making noodles, crackers, and
pastries. Durum wheat is ground into a coarse flour called semolina that is used for
making pastas. In local markets, the demand for a particular wheat class (and
quality) relative to its nearby supply will determine local prices. Traditional, higher-
protein wheats command a premium over lower-protein varieties, often referred to as
the “protein premium” (Figure 1). However, linkages to national and global
markets bring a d d i t i o n a l f a c t o r s — s u c h a s transportation costs,
competitors’ supplies, and foreign demand — into play in determining the price of
a particular wheat type and quality.
Source: USDA, ERS, Wheat Briefing Room Data, February , 2008.
Figure 1. U.S. Cash Prices by Major Wheat Class.
High Wheat Prices: What Are the Issues? 105
Wheat is the principal food grain grown in the United States; however, a
substantial portion (8%-10%) of the annual U.S. wheat crop is used as a feed
grain. As a result, wheat must compete with other cereals for a place at the
consumer’s dinner table, while also vying with coarse grains and other feedstuffs in
livestock feed markets. Almost half of the U.S. wheat crop is exported annually,
although the importance of exports varies by class of wheat. White wheat and HRS
wheat rely more than other wheat classes on sales into export markets. The larger
the share of exports to production, the greater the vulnerability to international
market forces.
In the U.S. domestic market, flour millers are the major users of wheat,
milling about 24% of annual wheat production into flour since 2000.[3] In most
cases, a wheat buyer at a flour mill will “source” wheat by general location and
primary quality attributes such as protein quantity and quality (i.e., gluten share)
and baking performance. Price premiums and/or discounts reflecting quality
differences often develop and can also influence buyer preferences. Other major
wheat processors include breakfast food, pet food, and feed manufacturers. Wheat
may be used directly in feed rations when alternate feedstuffs are lacking or when
production-related quality damage makes the wheat unmarketable as a food. Wheat
milling by-products such as bran, shorts, and middlings are also used by feed
manufacturers in the production of animal feeds.
KEY FACTORS CONTRIBUTING TO

HIGHER WHEAT PRICES IN 2007[4]
Poor Harvests in Many Major Wheat-Producing Countries
Early in 2007, estimates of Australia’s wheat production and exports were

reduced because of severe drought in 2006. Then, late-spring freeze damage in the
United States and heavy rains at harvest in the United States and Western Europe
reduced the output and quality of wheat. Next, dry weather hurt crops in Eastern
Europe and some countries of the former Soviet Union. Drought in southeastern Europe
reduced that area’s wheat and corn crops, forcing livestock producers in the European
Union (EU) to import wheat and feed grains for feed rations. By midsummer, it
became apparent that Canada and the Ukraine would reap smaller wheat crops
because of poor weather conditions.
106 Randy Schnepf
Limited Export Supplies
The production shortfalls curtailed exports from most traditional wheat

exporters. In the spring of 2007, both Ukraine and Argentina initiated export
restrictions in efforts to control food price inflation. The Ukraine imposed a ban
on wheat exports and Argentina stopped issuing export registrations, which
significantly slowed export sales during the rest of the year. Although the EU
was able to export wheat without export subsidies, shipments out of the EU
slowed sharply by late summer as wheat increasingly replaced corn used for feed.
By early fall, only the United States, Russia, and Kazakhstan had large volumes of
wheat available for export. Recently Kazakhstan officials have said that they also
intend on slowing their country’s wheat export pace (via higher custom duties) due
to declining supplies.[5]
Strong International Demand
Projected tight U.S. supplies, combined with reduced export competition,

caused importers to buy U.S. wheat (in late 2007) at a pace not seen since the
1970s. U.S. wheat export sales were very strong despite higher prices and record-
high ocean freight rates. Imports by high-income countries, which are not very price
sensitive, followed normal seasonal purchase patterns. However, a number of
low- and middle-income countries, generally expected to be more sensitive to price
changes, continued to purchase wheat even while prices were rising. Some importers
even bought larger amounts at record high prices, apparently out of fear that less
wheat would be available in the future, and prices would be even higher. In most years,
U.S. wheat export shipments decline seasonally during the winter, spring, and summer
months. But in 2007, shipments generally rose during this period, significantly
exceeding expectations almost every month. In August and September, U.S. wheat
export volume spiked, rising from monthly averages of less than 2.5 million metric
tons to more than 4 million tons. This occurred as wheat prices climbed to record
highs. Record high outstanding export sales (i.e., wheat that has been purchased,
but not yet exported) suggest that many importers have already purchased their
future needs far in advance of normal purchasing patterns, and that large monthly
U.S. wheat shipments can be expected to continue for some months to come,
regardless of future price movements.
Historically Low U.S. and Global Wheat Stocks
Global stocks are projected to drop to a 30-year low by July 2008, following
seven out of eight years in which global consumption exceeded production
(Figure 2). In the United States, the nearly three-decades-long decline in
planted area and production, coupled with the surge in export demand, has led to
projections for the lowest ending wheat stocks (237 million bushels) since 1
947.[6]
Substantial Price Premium Emerges for High-Protein Wheats
Because of a shortage of milling-quality wheat, prices for high-protein

(13%- 15%) spring wheat (HRS) — grown primarily in the Northern Plains —
have risen faster than prices for the ordinary- protein (10%-13%) wheats (HRW) of
the Southern Plains or the low-protein wheat (SRW) grown in the Delta and Corn
Belt states. In addition, in January USDA released an estimate for last fall’s
plantings of the winter wheat crop that, although up from last year, was significantly
below market expectations.[7] This increased the market concern about whether a
large U.S. spring wheat crop would be produced. As a result, cash and futures
market prices for HRS wheat — traded daily at the Minneapolis Grain
Exchange (MGE) — hit almost daily record highs through January and February. On
February 25, 2008, the nearby futures contract for HRS wheat closed at a
record $24 per bushel.[8] HRS wheat prices can be tracked in the cash market
by following daily price quotes for Dark Northern Spring (DNS) wheat out of
Minneapolis (Figure 1).
Prices for soft white wheat (grown primarily in the Pacific Northwest) have
also risen sharply in recent months. White wheat is used to produce a very
popular type of noodle eaten throughout eastern Asia. Australia is traditionally
the world’s largest supplier of white wheat, but last year’s drought-reduced harvest
drastically limited its export supplies. As a result, China and other Asian countries
have been competing for dwindling U.S. and international supplies of white wheat
and this has pushed prices sharply higher.
108 Randy Schnepf
Source: U SDA, PSD online d a ta b ase, February 8, 2008.
Figure 2. World Wheat Supply, Demand, and Stocks.
Pressures from Other Crops That Compete for the Same Area
U.S. wheat planted area has been steadily declining for the past 40 years as low
relative returns have led many farmers to shift to other, more profitable activities. This
phenomenon has clearly been evident in the Northern Plains, where the development
of short-season corn and soybean varieties has steadily cut into traditional wheat
areas. This process has accelerated since late 2005 with the rapid growth of corn-
based ethanol production, which has sparked high corn and soybean prices (Figure 3).
Wheat prices must rise high enough to compete for planted acres this spring (2008)
with the other grains and oilseeds. This area competition is also contributing to the
price run-up at the MGE.
OUTLOOK
Near-Term Outlook[9]
High commodity prices are expected to encourage farmers to expand

plantings this spring. However, since the land base is constant, the question is
which crops will get more area and which will lose. For 2008, USDA projects that
U.S. planted acreage will expand significantly for both wheat (up 6%) and soybeans (up
nearly 12%), while corn plantings will decline slightly (by about 4%). As a result,
assuming normal weather and average yields, U.S. wheat production is expected to
rise by nearly 13%. In addition, USDA projects that global wheat plantings and
output will rise substantially (although no official estimate for 2008 global
production is released until May). Larger global wheat supplies are expected to
significantly reduce international demand for U.S. wheat in the latter half of 2008.
Thus, the combination of higher production and lower exports is expected to
allow U.S. domestic wheat stocks to rebuild and wheat prices to decline from
their early 2007 peaks (while remaining high relative to past years). Markets are
likely to exhibit substantial price variability until global stock levels can be
rebuilt.
Long-Term Outlook[10]
As the global supply rebounds from the shortfalls of 2007, higher

projected production is expected to facilitate the rebuilding of stocks and the
return of prices to the $4 to $5 per bushel range over the next five- to ten-year
period.
Source: 20 00-2 007 : U SDA, W ASDE, Feb.8, 2008 ; 200 8, OCE O utlo ok Speech, Feb.
21 , 200 8; 2 009-2 012 : U SDA B asseline Feb . 2008 .
Figure 3. U.S. Farm Prices: Wheat, Corn, & Soybeans.
110 Randy Schnepf
FOOD PRICE EFFECTS

Domestic Food Price Inflation
The rise in agricultural prices, combined with high oil prices, have
contributed to higher food inflation in the United States and around the world. U.S.
food prices increased by 4% during 2007, the highest one-year rise since 1990. Prices
for cereals and bakery products were up by 4.4%. USDA predicts that food price
inflation for 2008 will be in the range of 3% to 4%, while bakery goods are expected to
rise by 5.5% to 6.5%.[11] Inflation concerns were further heightened when the U.S.
Bureau of Labor Statistics announced that food prices had jumped by 1.7% during
the month of January 2008 — the biggest monthly increase in three years.[12] Despite the
sharp increases in commodity prices in 2007, most economists agree that fuel costs
have played a larger role in food price inflation than have commodity
prices.[13] In general, retail food prices are much less volatile than farm-level
prices and tend to rise by a fraction of the change in farm prices. This is because the
actual farm product represents only a small share of the eventual retail price,
whereas transportation, processing, packaging, advertising, handling, and other
costs — all vulnerable to higher fuel prices — comprise the majority of the final
sales price.
International Food Prices and Aid
Due to trade linkages, high commodity prices ripple through international

markets where impacts vary widely based on grain import dependence and the
ability to respond to higher commodity prices. Import- dependent developing
country markets are put at greater food security risk due to the higher cost of
imported commodities.
The overall impact to consumers from higher food prices depends on the
proportion of income that is spent on food. Since food costs represent a
relatively small share of consumer spending for most U.S. households (about
10%), food price increases (from whatever source) are absorbed relatively easily in
the short run. However, low-income consumers spend a much greater proportion of
their income on food than do high-income consumers. Their larger share combined
with less flexibility to adjust expenditures in other budget areas means that any
increase in food prices potentially could cause hardship. In particular, lower-
income households in many foreign markets where food imports are an
important share of national consumption and where food expenses represent a larger
portion of the household budget may be affected by higher food prices.[14]
Humanitarian groups have expressed concern for the potential difficulties that higher
grain prices imply for developing countries that are net food importers.[15]
International food aid is the United States’ major response to reducing global
hunger.[16] Because most U.S. food aid activities are fixed in value by
annual appropriations, the amount of commodities that can be purchased declines
with rising food prices. In 2006, the United States provided $2.1 billion of such
assistance, which paid for the delivery and distribution of more than 3 million
metric tons of U.S. agricultural commodities. The United States provided food
aid to 65 countries in 2006, more than half of them in Sub-Saharan Africa.
REFERENCES
[1] CRS Report RL33204, Price Determination in Agricultural
Commodity Markets: A Primer.
[2] For current data and information on U.S. and world wheat production,
use, trade, and government policy, see USDA, Economic Research
Service (ERS), Wheat Briefing Room, available at
[http://www.ers.usda.gov/Briefing/Wheat/].
[3] CRS calculations based on data from, Wheat Situation and Outlook
Yearbook, WHS-2007, USDA, ERS, March 2007.
[4] Most of the information for this section is from “Large U.S. Wheat
Exports Despite High Prices,” Outlook for U.S. Agricultural Trade,
AES-56, ERS, USDA, pp. 13-14, Nov. 30, 2007.
[5] “Wheat Jumps on Supply Concerns,” Stevenson Jacobs,
Washingtonpost.com, Feb. 25, 2008.
[6] WASDE, USDA, World Agricultural Outlook Board, February 8,
2008.
[7] Winter Wheat Seedings, National Agricultural Statistics Service,
USDA, Jan. 11, 2008.
[8] “Markets on Tear: Wheat, Oil, Euro — Grain Trading Explodes in the
Minneapolis Pits; Speculators Flood In,” Wall Street Journal, Lauren
Etter, February 27, 2008.
[9] “Grain and Oilseed Outlook for 2008,” USDA, grain and oilseed ICECs,
USDA Agricultural Outlook Forum, Feb. 22, 2008.
[10] USDA Agricultural Projections to 2017, OCE-2008- 1, February 2008.
112 Randy Schnepf
[11] “Food Price Outlook, 2008,” Briefing Room: Food CPI, Prices, and Expenditures,
ERS, USDA, February 25, 2008.
[12] “Inflation at Highest Level in 26 Years,” Omaha World Herald,
February 26, 2008.
[13] For example, see “The Relative Impact of Corn and Energy Prices in the
Grocery Aisle,” John M. Urbanchuk, Director, LECG LLC, June 14,
2007.
[14] Shahla Shapouri and Stacey Rosen, “Energy Price Implications for
Food Security in Developing Countries,” Food Security Assessment,
2006, GFA-1 8, ERS, USDA.
[15] International Monetary Fund, World Economic Outlook: Globalization and
Ineqauality. October 2007. Washington.
[16] For more information see CRS Report RL33553, Agricultural Export and
Food Aid Programs by Charles Hanrahan.
Chapter 6
TESTIMONY OF JARED BERNSTEIN,

ECONOMIC POLICY INSTITUTE, HOUSE
COMMITTEE ON THE BUDGET OF THE
UNITED STATES HOUSE OF
REPRESENTATIVES, RISING FOOD PRICES:
BUDGET CHALLENGES, JULY 30, 2008*
Economic Policy Institute
FOOD, FAMILY BUDGETS, WAGES, AND PRICES

Chairman Spratt, Ranking member Ryan, I thank you for the opportunity to
testify, and I commend the committee for targeting this critical issue of rising
food prices and the resulting budget constraints facing families both here and
abroad. While there are many dimensions to this issue, including international
shortages and the underlying causes of rising global food prices, my testimony
will focus on one aspect of the rise in these costs: the food challenge facing
low-income families in this country.
Of course, many Americans are facing steep economic challenges. Prices
are rising quickly across the board, with inflation, driven largely by food and
energy costs, rising at 5% over the past year, and 6.1% for groceries (food
*
This is an edited, excerpted and augmented edition of a Economic Policy Institute publication.
114 Economic Policy Institute
purchased specifically for at-home consumption). A year ago, those inflation rates
were 2.7% and 4.6%.
While even families with significant resources tell pollsters they are
experiencing financial stress, a number of factors render the current period
particularly challenging for low-income families. First, in part due to the weak and
highly unequal recovery of the 2000s, poverty is actually higher now than it was
in 2000 and median family incomes, adjusting for inflation, are lower.[1] Second,
as discussed below, current labor market conditions are leading to broad losses
in real earnings. Measured on a year-over-year basis, Bureau of Labor Statistics
data show that real earnings are down every month since last October. And of
course, home values are declining, lowering the net worth of homeowners,
millions of whom face defaults on their mortgage loans and even foreclosure.
These factors are all germane to the topic of today’s testimony. As noted, food
prices are rising faster than overall inflation, and as I stress below, low-income
families spent a larger share of their income on food. Second, there is evidence
that the poor pay higher food prices, and that they face slightly faster food price
inflation. United States Department of Agriculture data on food budgets facing
low-income families show even faster price increases. Over the past year, their
low-cost budget for a family of four with two children rose 9.6%.
The combination of these factors is giving rise to steep increases in the food
stamp rolls, which in April (most recent data) hit their second highest level on
record, 28.1 million, a 1.8 million increase over last April. Even with this
increase, the Food and Research Action Council (FRAC) points out that one out
of three eligible persons fails to access the food stamp rolls.
Taking these facts and trends into account, I recommend that Congress consider
investing increased resources in the food stamp program, a step that was
proposed, though not taken, in the first stimulus package that passed earlier this
year. As I stress in my conclusion, including a food stamp expansion in a second
stimulus would fulfill two purposes. First, it would help to alleviate some of the
budget constraints documented below. Second, it would act as an effective
stimulus, as an increase of food stamp grants has been found to create the
“biggest bang for the buck” in terms of its multiplier effects.
FOOD PRICES AND FAMILY BUDGETS

The United States Department of Agriculture website section on food
prices begins with this assertion:
Testimony of Jared Bernstein 115
“In 2008, the Consumer Price Index (CPI) for all food is forecast to increase
4.5 to 5.5 percent, as retailers continue to pass on higher commodity and
energy costs to consumers in the form of higher retail prices. The CPI for food
increased 4.0 percent in 2007, the highest annual increase since 1990.”[2]
The food category includes both food purchased for home consumption and
food away from home. The analysis in this paper focuses on both of these,
with an emphasis on the latter, because groceries—food at home—is the
significantly larger budget category for low-income families, and because, unlike
food away from home, it is non-discretionary.
Consumer Expenditure Data reveal that groceries comprise a significantly
larger share of the food budget for low-income families. In 2006, for families in
the bottom income fifth, food in total comprised 15.6% of spending, while food
at home was 10.5%, or 2/3 of food expenditures. For families in the highest fifth,
food at home was 50% of food spending (the relevant shares were 10.9% overall
and 5.5% for food at home).
Figure 1 shows the rate of price growth for food at home and all items in the
CPI since 2000. The two measures grew at different rates over these years, with food
prices behind overall prices in some years and ahead in others. But in the last
three and a half years, the pattern has been clear: food prices have jumped
significantly ahead of overall prices. Thus far this year grocery prices are up
5.6% compared to 4.2% of overall prices.

Of course, the other key consumer good that has been speeding ahead of
overall inflation in recent months is energy. In fact, once we take gas and food
prices out of the overall index—which leaves the so-called core price index, often
cited by the Federal Reserve— inflation was up only 2.4% this year (annualized).
Clearly, these two commodities are currently driving prices up much faster
than the other items in the consumer market basket.
These values are averages, of course, and the focus of my testimony is on
lower-income families whose budgets are more stressed by higher prices. By
dint of their lower incomes, and often, their lack of assets and borrowing
constraints, these families have less “wiggle room” in their budgets and have to
shift from one category to another to make ends meet when an inelastically
demanded good like food or gas rises in price. Also, as I stress in a later section,
the weakening economy is eroding the wages and incomes of many families right
now, right when these commodity prices are spiking.
Figure. Food at Home and All Items, 2000-08.
Figure 2 shows the variation around the average budget share for all food and
for food at home. Each bar represents the share of expenditures on food for families
ranked by their income. The lowest income families spend 10.5% (15.6%) of
their expenditures on groceries (all food), compared to about 8% (13.5%) for
middle-income families and 5.5% (10.9%) for families in the top fifth. This
expenditure pattern is characteristic for necessities, since families tend to
purchase relatively similar amounts on these types of items compared to “luxury
goods.” Note, for example, that the ratio of food at home expenditures of the top
to the bottom fifth was 2.4 in 2006, while the same ratio for overall spending
(including all expenditures, not just food) was 4.6.
Thus far, we have established that low income families spend more of
their budgets on food, and that food prices are rising faster than average, implying
a greater consumption burden on these families relative to higher income families.
But we have only looked at average food prices. Do the poor face higher food prices
relative to those faced by higher income families? And do they rise more
quickly?
Throughout the years, researchers have found this to be the case. Part of this
stems from simple exploitation of vulnerable populations. For example, there is
evidence from the recent meltdown in housing markets suggesting the poorer
households were steered into more expensive loans. Part also stems from reduced
mobility of poorer persons such that they do not have the same mobility to avoid
relatively bad deals.
Figure. Spending shares of food, (All and at Home) by Income Fifth, 2006.
Most recently, Matt Fellowes finds the following:
“About 4.2 million lower-income homeowners paid higher than

average prices for their mortgages in 2004. About 4.5 million lower-income
households paid higher than average rates for auto loans. And countless more
paid higher prices for other necessities like basic financial services, food
and insurance than did their wealthier neighbors.”[3]
By comparing trends in the USDA thrifty (lowest cost) and low-cost food
plans to those in the CPI, we can get a sense of how the food prices faced by
low-income families are trending in recent years.[4] Figure 3 plots the prices of
the two low cost food budgets (four-person family with two young children)
against that of the CPI food-at-home index using data from June in each year.
Over the full period, the low-income budgets grow about 36% each compared
to about 27% for the CPI food-at-home index. Much of the gap between the two
series evolved over the past two years. Between 2007 and 2008, for example, the
thrifty budget rose 8.4%, the low-cost budget was up 9.6%, while CPI foodat-home
was up 6.1%.
Source: USDA and BLS.
Figure. Food price growth: Thrifty, Low-Cost, and CPI Food at Home, 2000-08.
WAGES AND FOOD

Though the economy is not officially in recession, key aspects of current

economic conditions are clearly recessionary. The job market in particular has
notably weakened, with net employment down about 440,000 jobs, and
unemployment up about a point compared to one year ago, to 5.5%. The
underemployment rate, a more comprehensive measure of diminished job
opportunities, was 9.9% in June.
The slowing job market has meant diminished wage pressure and fewer hours
of work.
At the same time, prices, driven by energy and food, have spiked. The result, as
shown in Figure 4, is a consistent negative trend in real wages. The figure plots
the annual changes in the average hourly and weekly earnings of the 80% of the
workforce in blue- collar or non-managerial jobs. As of late 2007, both series
were falling in real terms. Note that weekly earnings—the second bar for each
year—are falling more quickly than hourly earnings, due to declining weekly
hours worked.
Source: BLS.
Figure. Annual changes in real wages and weekly earnings, June 2007-08.
These wage dynamics are, of course, a stressor on family budgets. In

order to simply quantify the issue for low-wage workers, I took 1/2 of the average
production, nonmanagerial wage and divided this by the price of a gallon of

unleaded gas and five consumer food staples, as shown in the table. Half the
production worker wage is a good proxy for low wages, as it tends to be at a level
between the 10 th and 20percentile wage and it moves consistently with these
measures. We use it here because since it is released monthly, it allows for
up-to-date analysis.
Table 1 looks at the change in wages and commodity prices over the past
five years. Back in the second quarter of 2003, this hourly wage could buy just
under five gallons of gas, 2.9 gallons of milk, 7.8 pounds of apples, etc. Of
course, gas is much less affordable, and given the price and wage movements, the
low-wage workers can get only 2.4 gallons in the most recent quarter, half a
gallon less than five years ago. An hour of work yields seven fewer pounds of
flour, five fewer pounds, and about one pound less of bread.
Commodities per hourly wage (see text for explanation)
Unleaded Milk Apples Flour Rice Bread

Gas
Apr-Jun 2003 4.9 2.9 7.8 23.7 17.7 7.7
Apr-Jun 2008 2.4 2.4 7.1 17.0 13.1 6.5
Note: Data are from BLS. Liquid measures are per gallon, others, per pound.
CONCLUSION
All Americans are facing rising prices right now, led by energy and food.
But a few factors make this challenge particularly acute for low-income families.
First, food prices are rising faster than overall inflation, and low-income families
spent a larger share of their income on food. Second, there is evidence that the
poor pay higher food prices, and that they face slightly faster food price inflation.
Third, the downturn in the job market has led to fewer job opportunities and
slower wage growth.
How should Congress consider responding to these stressors? One useful
policy response would be to increase food stamp benefits as part of a second
stimulus package.[5]
The rationale for a second stimulus package is beyond my scope for this
testimony.I will only note that most analysts believe the first stimulus package
will raise the economy’s growth rate in the middle of this year, but that real GDP
growth will then slow to well below trend, barring further government
intervention. In this regard, Congress has begun discussing the utility of a second
stimulus package.
Though an increase in food stamp benefits was proposed in the first stimulus
debate, it was ultimately left out of the first stimulus, which largely emphasized
checks to households and tax cuts to businesses. There are two reasons to include a
food stamp expansion in the next package, if there is one.
First, increasing food stamp benefits would offset some of the budgetary
constraints stressed in my analysis. Of course, food stamp eligibility—generally,
family income must be below 1.3 times the poverty threshold to get the benefits—
will preclude some who need food assistance from the program. But among those
who do get food stamps, an extension of benefits is needed.
As the Food Research Action Council documents, food stamp rolls stand at
historically high levels. Most recent data, from April, show 28.1 million
recipients, the second highest monthly number in the history of the program, and
1.8 million above last year’s level. Even so, FRAC stresses that only 2 out of 3
eligible persons access the program.[6]
Second, research suggests that among the various programs typically considered
in the context of fiscal stimulus, food stamp benefits provide the biggest “bang for the
buck.” According to a study by Moody’s economy.com, for every extra dollar
spent on the program, real GDP grows by $1.73. Of the thirteen tax cuts or
spending increases considered, food stamps had the largest so-called multiplier
impact.
The Congressional Budget Office agrees with the thrust of this analysis,
stating that “the vast majority of Food Stamp benefits are spent extremely
rapidly. And because Food Stamp recipients have low income and few assets, most
of any additional benefits would probably be spent quickly.”[7]
Typically, implementation of a food stamp expansion is discussed in terms
of ratcheting up the benefits of food stamp recipients, as opposed to expanding
eligibility guidelines and covering more persons. Given the FRAC point regarding
missing eligibles from the program, Congress might consider some combination of
the two approaches: both raising the benefit level and devoting some resources to
boosting states’ administrative and outreach capacity with the goal of identifying
and signing up eligible families that are currently not on the program.
REFERENCES
[1] The poverty rate was 11.3% in 2000 and 12.3% in 2008. My forecast
is that poverty fell to 12.1% last year.
[2] http://www.ers.usda.gov/Briefing/cpifoodandexpenditures/consumerp
riceindex.htm
[3] http://www.brookings.edu/opinions/2006/0807metropolitanpolicy_
fellowesaspx
[4] http://www.cnpp.usda.gov/USDAFoodCost-Home.htm
[5] See this testimony for a discussion of the rationale for a second package:
http://www.epi.org/content.cfm/webfeatures_viewpoints_testmony_be
rnstein _squeeze
[6] http://www.frac.org/html/news/fsp/2008.04_FSP.htm
[7] http://www.cbo.gov/ftpdocs/89xx/doc8916/01-15-Econ_Stimulus. pdf
Chapter 7
TESTIMONY BY STEVE H. HANKE, APPLIED

ECONOMICS, THE JOHNS HOPKINS
UNIVERSITY AND THE CATO INSTITUTE ON
RISING FOOD PRICES: BUDGET CHALLENGES
BEFORE COMMITTEE ON THE BUDGET,
UNITED STATES HOUSE OF
REPRESENTATIVES, JULY 30, 2008
Mr. Chairman and members of the House Committee on the Budget, thank you
for this opportunity to present my views on rising food prices. To address the
problems associated with rising food prices, we must understand what has caused
prices to rise. I will address a major cause of the rise in food and other commodity
prices since 2001.
The evidence suggests that the Federal Reserve is a major culprit in the
commodity inflation story. But you wouldn’t know it from reading the press or
listening to officialdom and the political chattering classes. This isn’t
surprising. After all, economic history is written, to a large extent, by central
bankers. In consequence, one should take official accounts with a large dose of
salt.
Just consider the “bubble-blowing” charges leveled at the former chairman of the
Federal Reserve System Alan Greenspan. The former chairman has proclaimed
his innocence. Let’s look at the evidence.
What is a bubble? A bubble is created when the Fed’s laxity allows aggregate
demand to grow too rapidly. Specifically, a demand bubble occurs when nominal
124 Testimony by Steve H. Hanke
final sales to U.S. purchasers (GDP – exports + imports – change in inventories)

exceeds a trend rate of nominal growth, consistent with “moderate” inflation, by a
significant amount.
During Greenspan’s 18-year tenure as Fed chairman, nominal final sales grew at
a 5.4% annual trend rate. This reflects a combination of real sales growth of
3% and inflation of 2.4% (see Chart 1). But there were deviations from the trend.
Chart 1. Final Sales to Domestic Purchasers (FSDP) from 1987Q1 to 2008Q1

(year/year).
The first deviation began shortly after Greenspan became chairman. In

response to the October 1987 stock market crash, the Fed turned on its money
pump and created a bubble: over the next year final sales shot up at a 7.5% rate,
well above the trend line. Having gone too far, the Fed then lurched back in the
other direction. The ensuing Fed tightening produced a mild recession in 1991.
From 1992 through 1997 growth in the nominal value of final sales was quite
stable. But successive collapses in certain Asian currencies, the Russian ruble, the
Long Term Capital Management hedge fund and finally the Brazilian real
triggered another excessive Fed liquidity injection. This resulted in a boom in
nominal final sales and a bubble in 1999-2000. This was followed by another
Testimony by Steve H. Hanke 125
round of Fed tightening, which coincided with the bursting of the equity bubble
and a slump in 2001.
The last big jump in nominal final sales was set off by the Fed’s liquidity
injection to fend off the false deflation scare in 2002. Fed Governor Ben S.
Bernanke (now chairman) set off a warning siren that deflation was threatening the
U.S. economy when he delivered a dense and noteworthy speech, “Deflation:
Making Sure it Doesn’t Happen Here,” on November 21, 2002. He convinced
his Fed colleagues that the deflation danger was lurking. As Greenspan put it,
“We face new challenges in maintaining price stability, specifically to prevent
inflation from falling too low.” By July 2003, the Fed funds rate was at a record
low of 1%, where it stayed for a year. This produced the mother of all liquidity
cycles and yet another massive demand bubble.
During the Greenspan years, and contrary to his claims, the Fed overreacted
to real or perceived crises and created three demand bubbles. The last represents
one bubble too many—and one that is impacting us today.
Not surprisingly, the mother of all liquidity cycles has been accompanied
by a weak dollar. Indeed, the Federal Reserve’s Trade Weighted Exchange
Index has fallen by over 26% since 2001. And as every commodity trader
knows, all commodities, to varying degrees, trade off changes in the value of the
dollar. When the value of the dollar falls, the nominal dollar prices of internationally
traded commodities--like gold, rice, corn and oil--must increase because more
dollars are required to purchase the same quantity of any commodity. Accordingly,
a weak dollar should signal higher commodity prices. And it has. Since 2001,
when the dollar started its downward slide, the fifty-five commodities that make up
the Food and Agricultural Organization of the United Nation’s “Food Price Index”
have increased by 132.26%
Calculations that follow a method employed by the Federal Reserve Bank of
Dallas indicate the strength of the linkage between the change in the value of the
dollar and commodity prices (see Table 1). By computing what the prices of
various commodities would have been on June 30, 2008, if the U.S. dollar-euro
exchange rate would have remained the same as it was on December 28, 2001, we can
determine (on a counterfactual basis) what the exchange-rate (weak dollar)
contribution to the total change in various commodity prices has been since 2001.
For example, soybean prices have increased by 281.24% since 2001, and the weak
dollar has contributed 58.84% to the price increase of soybeans. In the case of
soybeans, real factors (supply and demand fundamentals) have also contributed
to the price increase since 2001.
126 Testimony by Steve H. Hanke
Lean hogs are at the other end of the spectrum. If the dollar-euro exchange rate
would have remained at its December 28, 2001 level, the price of lean hogs
would have declined from 57.05 cent/lbs. to 40.62 cent/lbs. during the December
2001 – June 2008 period. In fact, the price of lean hogs was 71.78 cents/lbs. on
June 30, 2008.
Accordingly, the exchange-rate contribution to the change in the price of lean
hogs since 2001 was 211.59%. This contribution exceeds 100% because real
factors were working to depress the price of lean hogs.
Contrary to Capitol Hill testimony by Fed chairman Bernanke as recently as
July 15, 2008, the weak dollar has played a significant role in pushing up food and
commodity prices. A stronger dollar would provide relief from sky-high food and
commodity prices.
Testimony by Steve H. Hanke 127
In closing, I would like to address the price of crude oil—an important input
in the production and distribution of food. Since 2001, the weak dollar has
contributed almost $61 per barrel to the current price of oil. In addition to a stronger
dollar, the U.S. government’s Strategic Petroleum Reserve could be transformed
from a “dead” resource into a dynamic, market-based force that would put
considerable downward pressure on crude oil prices.
The SPR is a response to the oil embargo imposed by the Organization of
Arab Petroleum Exporting Countries after the 1973 Arab-Israeli War. It
comprises five underground storage facilities, hollowed out from salt domes,
located in Texas and Louisiana. By 2005, the SPR’s capacity reached its current
level of 727 million barrels. At present, 706.8 million barrels are stored in the
SPR. That’s over twice the size of private crude oil inventories. To put SPR’s
size into perspective, its current storage would cover about 71 days of U.S.
crude oil imports or 47 days of total U.S. crude oil consumption. The SPR’s
drawdown capacity is 4.3 million barrels per day. That rate is slightly greater than
the combined daily crude oil exports from Iran and Kuwait. In short, the SPR is
huge.
Not being faced with capital carrying charges and never wanting to be
caught short, government officials, like proud pack rats, want to just sit on this
mother of all commodity hoards. They argue that the SPR represents an insurance
policy for national emergencies. But without a specified release rule, just what is
the insurance policy written for?
What should be done with the hoard of crude oil in the SPR? It’s time to
remove the release rules from the grip of politics. Market-based release rules
would transform the SPR into an oil bank. It would provide the country with a
huge precautionary inventory of oil, generate revenue to defray some of the
government’s stockpiling costs, smooth out crude oil price fluctuations, and push
down spot prices relative to prices for oil to be delivered in the future.
How would the oil bank work? The government would sell out of the money
call options on the SPR stockpile. It might, say, sell December 2008 call options
with a strike price of $150 a barrel. If the price surged above that level, the
option buyer would exercise and take delivery of crude oil from the
government’s stockpile. If the price never reached $150, the option would
expire worthless and no crude oil would be released.
If we want lower oil (and food) prices, we can obtain them immediately
by replacing politically-based release rules for the SPR with market-based rules.
Chapter 8
TESTIMONY OF JACK HUTTNER,

BIOREFINERY BUSINESS DEVELOPMENT,
GENENCOR, TO THE SENATE COMMITTEE ON
ENERGY AND NATURAL RESOURCES
HEARING: “THE RELATIONSHIP BETWEEN US
RENEWABLE FUELS POLICY
*
AND FOOD PRICES”, JUNE 12, 2008
I would like to thank the committee for inviting me to testify today. I am here
on behalf of my company, Genencor, a division of Danisco A/S, and the Industrial
and Environmental Section of the Biotechnology Industry Organization – BIO, of
which Genencor is a long-standing member.
Genencor is a leading industrial biotechnology company with over 1500
employees around the world. Our specialty is the development and production of
biotech enzymes for the ethanol, detergent, textile and feed industries.
BIO’s members include enzyme producers, like Genencor, as well as
agricultural seed companies, oil companies, first and second generation biofuels
companies and dedicated energy feedstock developers. Each is helping to deliver
technologies that enhance agricultural productivity and energy security, boost the
rural economy and deliver a cleaner environment.
I wanted to start by thanking you and your colleagues in Congress for your
continued support of the emerging biofuels industry in the US. The Renewable
Fuels Standard included in the 2007 energy bill and the biofuels provisions in this
year’s farm bill are essential to the shared vision of a strong, sustainable future in
130 Testimony of Jack Huttner
which America’s farmers continue to produce abundant supplies of food and feed
while also helping to meet our growing energy needs. We at Genencor, and our
colleagues in BIO, are working hard to help make this vision a reality.
Recently, the media has been full of stories linking food price increases to
ethanol production. This is a false debate. We have the ability to produce both
food and biofuels in abundance. Many commentators have noted the various
factors driving global food price increases, including dramatically rising oil
prices, booming demand for animal feed in China and India, drought in
agricultural producing regions and the weak US dollar. And yes, biofuels
production, although experts have repeatedly pointed out that biofuels production
is a relatively minor cause of food price increases. I would note that the prices of
agricultural commodities that have little or no relationship to biofuels, such as rice
and wheat, have risen right along with corn and soybeans. As Dr. Otlaw has
testified, the study recently released by Texas A&M University found that the
primary underlying force driving price increases in the agricultural industry, as
with the economy as a whole, is higher energy prices – $100 + per barrel oil in
particular – and that somehow freezing, rolling back or eliminating the RFS
would not result in significantly lower corn or food prices. In fact, Merrill Lynch
estimates that without ethanol, gasoline prices would be at least 50 cents higher
than they are today, further exacerbating the pressures on food and commodity
prices.
There is another story that the media has not been telling so effectively -- the
story of steadily increasing agricultural productivity. We have seen a decade’s
long year-on-year crop yield improvement. And, we are about to see a dramatic
increase in that rate of improvement in the near future. New plant varieties are
steadily becoming more drought and pest resistant and more efficient in their use
of fertilizer. Yields, the amount of corn, soybeans, or other product per acre, are
rising steadily. This is partly why we believe there is no long term food and fuel
tension. In the last decade global production of corn has risen almost 35%, and
soybeans over 50%. That increased production was achieved with only a 6%
increase in planted acres – that is the power of increasing yields, which act like
compounded interest adding more production each and every year. In the mid-
1970s America was producing about 90 bushels of corn per acre. Today, just 30
years later, that number has increased to 150 bushels per acre, and we are on our
way to 200 bushels per acre in the next decade. In fact, McKinsey & Company
estimates that if current biotech-based yield trends continue, no more additional
acres will be needed to meet the 15 billion gallons of conventional starch based
ethanol required by the RFS.
Testimony of Jack Huttner 131
Improving agricultural yields have not been uniformly achieved, however.

Many parts of the world are still using agricultural practices that are many
decades old, and have agricultural yields one quarter that of the US. Indeed, the
world wide average corn yield per acre is 50% of the yield in the US. In some
countries, corn yields are below 30 bushels per acre, just one-fifth of ours. On
Tuesday, the Wall Street Journal featured a story on the food crisis. The story
reported on new thinking by development agencies that have refocused attention
on the need for increased investment in seeds and fertilizers in the developing
world. The real policy focus should be on how to help other parts of the world
such as Africa, Eastern Europe and Asia, expand agricultural productivity. There
is huge upside opportunity in agricultural productivity from the existing acreage.
We can grow our way out of this if we can expand the distribution of agricultural
progress.
Renewable Fuels Standard Requirements

40
35
30
Requirement (Billions of Gallons)
25
Biotech-Enabled
20
15
Undifferentiated Advanced Biofuel
Biomass-based Diesel
10 Cellulosic Biofuel
Biotech improved Renewable Biofuel
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Year
132 Testimony of Jack Huttner
U.S. CORN YIELD HISTORY AND TRENDS
190 182.36
180
168.86
170
160
150
bushels/acre
140
130
120
110
100
90
80
70
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
In addition to our contributions to increase yield, the US biofuels industry is
on the verge of commercializing second generation technologies that will use non-
food feedstocks, like corn stover, switch grass and waste wood. Indeed, Genencor
and DuPont have just formed a joint venture to develop this technology and we
hope to have our pilot plant operational next year. Within five years, we expect to
be producing commercial quantities of cellulosic ethanol. Is there enough biomass
to produce a significant amount of second generation biofuels? To answer this
question, BIO recently produced a report on the sustainable harvest of cellulosic
biomass for biorefinery feedstock. Based on published USDA data, it concluded
that farmers could supply over 200 million dry tons annually of corn stover,
enough feedstock to double ethanol production from America’s corn acres. Much
of this biomass will be processed at existing ethanol facilities retrofitted to handle
cellulosic feedstocks in addition to grain. That’s why the infrastructure being
developed for today’s ethanol industry is so vital to the next generation as well.
Everyone understands the impact of higher commodity input costs that we all
face. I am very concerned, however, that critics of biofuels and the RFS are
pointing the finger of blame at the wrong culprit. If Congress over-reacts, our
ability to bring next generation biofuels to market could be badly damaged. We
need the RFS to set the floor for biofuels demand so companies like Genencor and
DuPont will continue to invest in second generation biorefineries. BIO’s member
companies believe the RFS is the right standard, at the right time, for the right
reasons.
Testimony of Jack Huttner 133
Of course, we can’t simply depend on corn alone. In addition to agricultural

residues, BIO member companies like Ceres and Mendel are developing
dedicated energy crops like switchgrass and Miscanthus as biorefinery feedstocks
of the near future. In fact, Ceres just introduced the first commercial switchgrass
variety that will be on the market at the end of this year. These crops will bring
new revenue to farmers, increase biomass yield per acre with the lowest possible
water and energy inputs per ton.
Cellulosic ethanol is on the verge of becoming a viable industry. The long
standing support of the US Government for basic research, applied R&D and
demonstration facilities will soon be paying off. Congressional authorization and
funding of the USDA and DOE, for example, have made the transition to
cellulosic ethanol possible. These investments have laid the groundwork for a
new, low-carbon economy. This is an economy that uses renewable carbon from
plants to replace fossil carbon for the production of fuels and chemicals in
addition to food and fiber.
This is about more than just ethanol. Many BIO member companies are
working aggressively to commercialize other advanced biofuels, such as the bio-
butanol that DuPont is developing with BP. Existing ethanol infrastructure can be
retrofitted with this technology. Several cutting-edge companies are developing
“renewable hydrocarbons” to make gasoline and diesel from carbohydrates and
algae. In the future, biorefineries will be scattered throughout the rural landscape
converting biomass into many different products, all with a reduced life cycle
carbon footprint. This is the promise of the biobased economy.
Perhaps the history of the oil refining industry is informative to the current
biofuels debate. It was in 1853 that the first petroleum product – kerosene – was
produced from seep oil to replace whale oil. It has taken over 150 years for the
modern oil refinery to evolve from that point to where it can take in a barrel of
crude oil and produce a myriad of downstream products.
Modern biorefineries are at about that stage of development. We are at the
beginning of the biorefinery journey – not the end. Twenty years from now,
modern biorefineries will use a variety of renewable feedstocks and produce a
variety of products and liquid fuels. But the ethanol plants we are building today,
and the infrastructure supporting them, is the foundation we will build upon.
Without a robust and stable policy framework, the journey will be much more
difficult, if not impossible. We hope our Congressional leaders will not be
stampeded by the chorus of negativity that seeks to reverse the biofuels policy
Congress has worked so hard to develop and enact. We must keep the RFS in
place and stay on course to realize the great commercial and environmental
potential that a biobased economy can bring. Thank you.
Chapter 9
STATEMENT OF JOSEPH GLAUBER, BEFORE

THE COMMITTEE ON ENERGY AND
NATURAL RESOURCES, UNITED STATES
SENATE,
JUNE 12, 2008
Mr. Chairman, members of the Committee, thank you for the opportunity to
discuss the effects of the expansion in biofuels production in the U.S. on

commodity markets and food prices here and abroad. In the United States, two
commodities, corn and soybean oil account for over 90 percent of biofuels
production. From April 2007 through April 2008, corn and soybean prices rose by
over 50 percent in response to a variety of factors, including domestic and global
economic growth; global weather; rising input costs for energy; international
export restrictions; and new product markets, particularly biofuels. Over the same
period, global food commodity prices as measured by the International Monetary
Fund (IMF) rose by over 45 percent and retail food prices in the U.S. increased
by more than 5 percent. I will describe the factors affecting farm commodity
prices and the effects of biofuels production on commodity prices, global food
prices, and retail food prices in the United States.
136 Statement of Joseph Glauber
KEY FACTORS BEHIND THE

INCREASE IN COMMODITY PRICES
Many factors have converged to increase commodity prices. Global economic
growth, weather problems in some major grain producing countries, and
depreciation in the value of the dollar have increased the demand for U.S.
agricultural commodities, leading to higher commodity prices. In FY 2008, the
value of U.S. agricultural exports is projected to reach a record $108.5 billion, up
from last year’s record of $81.9 billion.
Global economic growth is boosting the demand and prices for agricultural
commodities. Real foreign economic growth was a healthy 4.0 percent in 2007,
only slightly below 2006’s robust rate of 4.2 percent. Foreign economic growth is
expected to be 3.9 percent in 2008, down slightly from 2007, but well above trend,
as has been the case beginning in 2004 (Economic Research Service). Asia,
excluding Japan, will likely grow at over 7 percent in 2008, above trend for the fifth
consecutive year. Higher incomes are increasing the demand for processed
foods and meat in rapidly growing developing countries, such as India and
China. These shifts in diets are leading to major changes in international trade.
For example, China’s corn exports are projected to fall from 5.3 million metric
tons in 2006/07 to 0.5 million metric tons in 2007/08, as more corn is used for
domestic livestock feeding.

Adverse weather events in a number of countries have reduced production
leading to higher commodity prices. The multi-year drought in Australia
reduced wheat and milk production and that country’s exportable supplies of
those commodities. Drought and dry weather have also adversely affected grain
production in Canada, Ukraine, the European Union, and the United States. These
weather events have helped to deplete world grain stocks. With world stocks for
wheat at a 30-year low, grain importers are increasingly turning to the U.S. for
supplies. Furthermore, the tight stocks situation is leading to increasing concerns
that prices could move sharply higher if this year’s harvest falls below
expectations. These concerns are causing some importers to purchase for future
needs, pushing prices higher.
Many exporting countries have put in place export restrictions in an effort to
reduce domestic food price inflation. The United Nations Food and Agriculture
Organization recently noted the cereal import bill of the world’s poorest countries is
forecast to rise by 56 percent in 2007/2008, which comes after a significant
increase of 37 percent in 2006/2007. Exporting countries as diverse as Argentina,
China, India, Russia, Ukraine, Kazakhstan, and Vietnam have placed additional
Statement of Joseph Glauber 137
taxes or restrictions on exports of grains, rice, oilseeds, and other products. By

reducing supplies available for world commerce, these actions exacerbate the
surge in global commodity prices. Export restrictions are ultimately self-defeating,
reducing the incentives for producers to increase production.
Higher food marketing, transportation, and processing costs are also
contributing to the increase in retail food prices. Record prices for diesel fuel,
gasoline, natural gas, and other forms of energy affect costs throughout the food
production and marketing chain. Higher energy prices increase producers’
expenditures for fertilizer and fuel, driving up farm production costs. Higher
energy prices also increase food processing, marketing, and retailing costs. These
higher costs, especially if maintained over a long period, tend to be passed on to
consumers in the form of higher retail prices. ERS estimates direct energy and
transportation costs account for 7.5 percent of the overall average retail food
dollar. This suggests that for every 10 percent increase in energy costs, the retail
food prices could increase by as much as 0.75 percent if fully passed on to
consumers.
RECENT DEVELOPMENTS IN COMMODITY MARKETS

Higher commodity prices are contributing to the increase in food price

inflation, even though in the United States the farm value accounts for only
about 20 cents of each dollar spent on food. For highly processed foods, such as
cereal and bakery products, the farm component of the retail value is less as
processing costs account for a higher portion of the retail value. In contrast, for
food products that undergo little processing prior to being consumed, such as
eggs and fresh fruits and vegetables, the farm value accounts for a much larger
share of the retail value.
The index of prices received by farmers for all products increased by 18
percent in 2007, as farm prices for several major crops, beef, milk, broilers, and
eggs either reached new record highs or posted large annual gains. Compared to
one year ago, the index of prices received by farmers for all products was up 13
percent during the first 4 months of 2008. Over the same period, the prices
received for all crops were up 19 percent, reflecting continued strong prices for
major crops. Meanwhile, the prices received for livestock and livestock products,
while up 7 percent during the first 4 months of 2008 compared to one year ago,
have moderated in recent months as record large supplies of red meat and poultry
have lowered farm prices for cattle and hogs.
Wheat & Coarse Grains
The 2007/08 wheat marketing year reflects a third straight year in which
global production has fallen short of consumption, driving expected world stocks
to their lowest level in 30 years. Back-to-back years of lower production in the major
exporting countries, including Australia, Canada, and the European Union, have
combined with below- trend yields in the United States to reduce the availability
of exportable supplies. Tight supplies in competitor countries and restrictions on
exports in major producing countries such as Argentina, Ukraine, and Russia
have boosted export demand for U.S. wheat. U.S. ending stocks are projected at
their lowest level in 60 years. As a consequence, wheat prices have increased to
record levels. Farm prices for 2007/08 are estimated at a record $6.50 per bushel,
sharply higher than last year’s $4.26 and the previous record of $4.55 per bushel.
Wheat producers indicated in March they intend to plant 63.8 million acres in
2008, up 6 percent from 2007. Yield prospects for the 2008 crop remain mostly
favorable, but persistent dryness remains a concern in the southwestern portions
of the hard red winter wheat belt in western Kansas and the panhandle areas of
Texas and Oklahoma. In addition to higher production in the U.S., wheat
production in other major wheat producing countries is expected to rise sharply as
planted area is up around the world, spurred by record prices and encouraged by
favorable fall sowing weather. If trend yields are achieved, world production
could set a new record, rising as much as 50 million tons from 2007/08. Global
production is expected to exceed global consumption for the first time in four
years leading to some recovery in global wheat stocks. Nonetheless, the
average farm price is projected to increase in 2008/09 to $6.75-$ 8.25 per
bushel, supported by forward sales made at prices well above last year’s level.
Cash wheat prices during the first quarter of the marketing year are also expected to
be supported by strong competition between domestic mills and foreign buyers.
The U.S. corn market in 2007/08 is characterized by record production and
farm prices driven by strong domestic and export demand, which is boosting use
to record levels. U.S. producers planted 93.6 million acres to corn in 2007, the
largest plantings since 1944. Domestic use for 2007/08 is estimated at a record
10.5 billion bushels, up 1.4 billion or 16 percent from last year. Ethanol use,
projected at 3.0 billion bushels, is expected to surpass exports for the first time
ever, accounting for 23 percent of total corn use. Despite high prices, export
demand remains strong with growing world demand for animal protein and tight
supplies of feed quality wheat, particularly in the European Union. Exports are
projected at a record 2.45 billion bushels, up 15 percent from last year. The farm-
level price of corn for 2007/0 8 is expected to average a record $4.25-$4.45 per
bushel, up substantially from $3.04 per bushel in 2006/07.
Corn prices are expected to rise again in 2008/09. Demand is expected to remain
strong, supported by expanding use for ethanol, which is forecast to reach 4 billion
bushels in 2008/09. Corn area and production are expected to be lower in 2008/09
as record soybean prices and high input costs for corn encourage a rebound in
soybean plantings. Producers indicated in March they intend to plant 86.0 million
acres of corn in 2008, down 8 percent from last year. In addition, cool, wet
weather slowed planting progress, which could also lead to lower corn plantings
and lower yields in 2008. With higher use and lower production, ending stocks are
expected to decline, keeping upward pressure on prices. The farm price of corn is
forecast to average $5.30-$6.30 per bushel in 2008/09.
Rice
Tighter domestic rice supplies, higher global rice prices, and export bans
imposed by some major rice exporters have helped to boost U.S. rice prices in
2007/08. Producers cut back on rice area in 2007 by 3 percent, because they
could earn higher returns by planting alternative crops such as wheat, corn,
sorghum and soybeans. U.S. exports in 2007/08 are projected to increase 23

percent to 112 million hundredweight (cwt). Tight global supplies and self-
imposed export bans in Egypt, Vietnam, and India are helping to support U.S.
exports. Rice ending stocks are forecast at 21.6 million cwt, down from carry-in
stocks of 39 million cwt. The season-average farm price is forecast at $12.85-
$13.15 per cwt, up from $9.96 in 2006/07 and the highest since 1973/74.
Domestic rice prices in 2008/09 are expected to be higher than in 2007/08 due to
tighter domestic and global supplies and higher world prices.
Soybeans
U.S. soybean prices are record high this year, reflecting lower production
and strong demand. The farm price received for soybeans is estimated to average
$10.00 per bushel during 2007/08, compared with $6.43 last marketing year and
the previous record of $8.73 per bushel set in 1983/84. Lower production was
brought about by sharply lower planted area as producers shifted some soybean
acres to corn in 2007. Lower stocks are projected in part due to strong export
demand for U.S. soybeans resulting from record imports by China and limited
growth in South American supplies despite high prices.
U.S. soybean crush is also a contributing factor to declining stocks as foreign
demand for U.S. soybean meal remains exceptionally strong. Wheat shortages in
many parts of the world are leading to strong export demand for soybean meal
protein which can be used to replace wheat in feed rations. Soybean crush is also
supported by growing demand for biodiesel, production of which is expected to
account for 14 percent of total soybean oil use for 2007/08. Strong domestic
and export demand have pushed prices for both soybean meal and soybean oil
higher. The prices of both soybean meal and soybean oil are up by over 50
percent in 2007/08, compared with one year ago.
U.S. producers indicated in March they intend to plant 74.8 million acres to
soybeans in 2008, up 18 percent from last year. If these intentions are realized,
soybean supplies for 2008/09 could increase as larger production more than
offsets sharply lower beginning stocks. Reflecting the increase in projected
soybean production, soybean ending stocks are expected to rebound in
2008/09 from this year’s very low level. Forward sales at prices above last
year’s average and high corn prices are likely to push soybean prices higher in
2008/09. The farm price of soybeans is currently forecast to average $1 1.00-
$12.50 per bushel in 2008/09.
Retail prices for fruits and vegetables increased 3.8 percent in 2007, as
fresh fruit and vegetable prices rose by 3.9 percent and processed fruit and
vegetable prices rose by 3.6 percent. Price spikes in these commodities are often
linked to drought or freeze damage. In 2008, the CPI for fruits and vegetables is
projected to increase by 3.5-4.5 percent.
Livestock and Poultry
Beef production is currently forecast to increase by 1.5 percent in 2008 due

to continued strong cow slaughter. Drought conditions in the Southeast led to strong
increases in cow slaughter last year and, even with a return to normal weather in
2008, cow slaughter is expected to remain relatively high in 2008. The January
Cattle report indicated the cow herd continued to contract during 2007. Beef
cow numbers were estimated about 0.6 percent lower than a year ago, and the
number of beef cows expected to calve was down 1 percent. In addition, the
number of beef heifers to be retained for the breeding herd was down 3.5
percent. Higher feed costs are lowering returns to cattle feeders. Nebraska
Direct steer prices averaged a record $91.82 per cwt in 2007 and are expected to
average $89-$93 per cwt. in 2008.
Pork production in 2008 is expected to increase 6.6 percent due to expansion
triggered by positive returns to producers in 2006 and 2007 and strong
productivity gains. However, the growth in production is expected to slow
later in the year as producers respond to much higher feed costs. The most
recent Quarterly Hogs and Pigs report indicated that producers farrowed 5 percent
more sows during December 2007-February 2008, but intend to farrow 2 percent
fewer sows during June 2008-August 2008. In 2008, hog prices are expected to
decline from 2007’s $47.09 per cwt to $46-$48 per cwt.
Broiler producers reacted to low returns in 2006 and pulled back broiler
production during the last two quarters of 2006 and the first two quarters of
2007. As broiler prices hit record levels in mid-2007, broiler producers responded
by expanding production. Since last fall, weekly estimates of chicks placed for
growout were consistently 3 to 5 percent above a year earlier, but the increase
in placements has dropped below 3 percent recently. However, little to no
expansion in broiler production is expected during the second half of 2008, as
producers respond to higher corn and soybean meal prices. Broiler prices for
2008 are forecast to average 80 to 83 cents per pound in 2008, compared with a
record 76.4 cents in 2007.
Eggs
In 2007, the wholesale price for a dozen grade A large eggs in the New
York market averaged $1.14 per dozen, 43 cents higher than the previous year.
The strong increase in egg prices reflected lower production and strong
domestic demand. In 2007, table-egg production was down 1 percent, as
producers lowered production in order to increase the hatching-egg flock.
Given the current size of the table-egg flock and the number of birds
available to add to the flock, no significant expansion in production is expected in
2008. Wholesale table-egg prices (New York area) averaged $1.59 per dozen in the
first-quarter, up 51 percent from the previous year. Prices are expected to decline
seasonally in the second quarter and average $1.21-$1.25 per dozen in 2008.
Milk
Very strong international dairy product prices, robust domestic demand

and modest expansion in domestic production in response to very low milk prices in
2006 were the primary factors pushing up dairy product prices in 2007. The
recent increase in feed costs probably had only a minimal effect on milk
production in 2007.
Although higher feed costs are expected to temper later-year expansion
plans, milk producers are expanding herds in response to generally favorable returns
during much of 2007. Production in 2007 increased about 2 percent as the herd
increased fractionally. Milk per cow increased but lagged its historical growth.
Driven by strong domestic demand and sharply higher international prices in
response to declining milk production in Australia due to drought and limited
surpluses of dairy products in the European Union, the all-milk price averaged a
record $19.13 per cwt, over $6.00 above 2006. Cow numbers are expected to
increase further in 2008 but high feed costs may slow the growth in milk per
cow. Milk production in 2008 is expected to increase about 2 percent and about
equal the growth in demand for dairy products domestically and for export. The
all-milk price is forecast to average $1 8.90-$ 19.30 per cwt in 2008.
EFFECTS OF BIOFUELS PRODUCTION

ON COMMODITY PRICES
In recent years, the conversion of corn and soybean oil into biofuels in the
United States has been an important factor shaping major crop markets. The
amount of corn converted into ethanol and soybean oil converted into biodiesel
nearly doubled from 2005/06 to 2007/08. The growth in biofuels production has
coincided with rising prices for corn, soybeans, soybean meal, and soybean oil.
While increased biofuels production in the United States is partially responsible
for the increase in domestic corn and soybean farm prices, other factors have also
contributed to the sharp increase in prices for these commodities. The strength in
exports resulting from global economic growth and drought and dry weather in
some major grain producing countries has boosted prices for corn and soybeans.
For example, corn exports are projected to reach 2.45 billion bushels in 2007/08,
up from 2.1 billion bushels in 2005/06, and soybean exports are projected to
increase by 18 percent over the same period.
Estimating the effects of increased ethanol and biodiesel production on

domestic agriculture and domestic food prices necessitates segmenting the portion
of the increase in corn and soybean prices due to the expansion in ethanol and
biodiesel production and the increase in corn and soybean prices due to other
factors. Various analytical approaches were used to estimate the effects of
increased ethanol and biodiesel production on corn and soybean prices. Table 1
compares actual and estimated corn and soybean prices over the period
2005/06- 2007/08, assuming corn used for ethanol and soybean oil used for
biodiesel production in the United States remained unchanged from the amount
used in the 2005/06 marketing year.
Table 1. Estimated Effects of Increased Ethanol and

Biodiesel Production on Corn and Soybean Prices
2005/06 2006/07 2007/08

Corn Price ($/Bu.)
Actual 2.00 3.04 4.25
Alternative 1/ 2.80 3.60
Soybean Price ($/Bu.)
Actual 5.66 6.43 10.00

Soybean Oil Price (cents/lb.)
Actual 23.41 31.02 52.00
Soybean Meal Price ($/ton)
Actual 174 205 315
Alternative 1/ 201 274
1/Assumes the amount of corn used for ethanol and soybean oil used for biodiesel
production in the United States remained unchanged from the amount used in the
2005/06 marketing year. This scenario was selected to depict the effects of
increased ethanol and biodiesel production on corn and soybean prices and does not
represent a specific policy scenario.
Under the alternative scenario, lower corn and soybean oil use resulting
from reduced production of biofuels leads to lower prices for corn, soybeans,
soybean oil, and soybean meal. In addition, changes in relative returns for corn
and soybeans cause producers to switch from planting corn to planting soybeans.
Lower corn and soybean prices could also result in increased plantings and lower
prices for other crops and lower feed costs to livestock producers.
The recent increase in corn and soybean prices appears to have little to do
with the run-up in prices of wheat and rice. Corn and soybean prices began
increasing during the fourth quarter of 2006. By this time, producers had
already planted the 2007 winter wheat crop. Rice and spring wheat plantings
could have been affected by increasing corn and soybean prices but weather
problems, low stocks, and strong global demand likely had a much greater
impact on wheat and rice prices than increasing corn and soybean prices in
2007/08. In 2008, U.S. wheat producers indicate they intend to plant more acreage
to wheat while rice acreage is projected to remain flat, suggesting that higher corn
and soybean prices have not greatly altered wheat and rice producers’ planting
decisions.

ON GLOBAL FOOD COMMODITY PRICES
The International Monetary Fund’s (IMF) global food commodity price index
is often quoted as an indicator of the change in global food prices. The IMF
global food commodity price index includes a bundle of agricultural commodities

including wheat, corn (maize), rice, barley, vegetable oils and protein meal, meat,
seafood, sugar, bananas, and oranges. A complete list of the commodities
included in the index, the percentage change in each commodity price, and the
estimated contribution of each commodity to the overall percentage change in the
food price index from April 2007 to April 2008 are presented in Table 2. It is unclear
how the list of commodities and the prices used in the IMF index relate to the
foods purchased and the prices paid for food items by consumers in other
countries.
The IMF global food commodity price index increased by 45.0 percent from
April 2007 to April 2008. Sunflower oil and rice exhibited the largest price changes,
with prices for both commodities increasing by over 200 percent. Prices for corn,
wheat, soybeans, soybean oil, soybean meal, palm oil, sunflower oil, and rapeseed
oil also exhibited relatively large price increases, while the prices for beef and
swine meat actually fell.
Combining the change in corn prices with the corn weight of 8.1 percent, the
change in corn prices contributed 5.0 percentage points to the estimated 45.6
percent increase in the global food commodity price index. Soybeans, soybean oil,
and soybean meal exhibited larger price increases and play a much larger role in
the global food commodity price index, a combined weight of over 15 percent.
The combined effects of the increase in soybean, soybean meal, and soybean oil
prices contributed 11.7 percentage points to the estimated 45.0 percent increase in
the IMF global food commodity price index from April 2007 to April 2008.
Table 2. Contribution to the IMF Food Commodity

Price Index, April 2007 to April 2008. 1/
April 2007 to April Contribution to

Food Commodity Weight 2008 Overall Change
Percentage Change Percentage Points

Food 100 45.0 45.0
Cereals
Wheat 10.9 82.7 9.0
Corn (Maize) 8.1 61.7 5.0
Rice 3.6 215.0 7.7
Barley 2.2 51.0 1.1
Vegetable oils and Protein
Meals
Soybeans 7.5 78.6 5.9

Soybean Meal 4.6 69.3 3.2
Soybean Oil 3.2 80.9 2.6
Palm Oil 6.2 67.9 4.2
Sunflower Oil 0.5 223.5 1.2
Olive Oil 1.3 -4.8 -0.1
Fish Meal 1.6 -8.1 -0.1
Groundnuts 1.5 66.6 1.0
Rapeseed Oil 2.0 87.1 1.7
Meat
Beef 7.2 -11.8 -0.9
Lamb 1.3 16.9 0.2
Swine Meat 5.6 -6.5 -0.4
Poultry 4.7 5.0 0.2
Seafood
Fish 15.2 7.2 1.1
Shrimp 3.7 -23.0 -0.8
Table 2. (Continued).
April 2007 to April Contribution to

Food Commodity Weight 2008 Overall Change
Sugar
Free Market 2.8 30.5 0.9
United States 0.2 -1.8 0.0
EU 1.2 -0.4 0.0
Bananas 2.3 49.9 1.2
Oranges 2.5 42.7 1.1
1/Estimated from the International Monetary Fund (IMF) 8 price indices and 49 actual
price series. The prices are available from the IMF web site at http://www.imf.org/
In order to estimate the impact of the increased production of U.S. biofuels

on global food prices, one needs to estimate the direct and indirect effects of the
increased use of corn and soybeans on individual commodity prices. Last month,
CEA testified before the Senate Foreign Relations Committee about corn-based
ethanol’s impact on global food prices using this strategy. The analysis below
continues in this spirit, but it considers a broader category of factors and costs
and a slightly different time period. Here the analysis is updated to the 12
months ending in April and the analysis considers a broader mix of biofuels--
focusing on corn-based and soybean oil-based biofuels.
Table 3 presents the estimated effects of increased ethanol and biodiesel
production in the United States on global prices for corn, soybeans, soybean oil,
and soybean meal as well as the impact on the IMF global food commodity
price index. We estimate that the percentage increase in the price of corn from
April 2007 to April 2008 would have been 23 percent lower in the absence of any
growth in biofuel production in the United States. Based on this analysis, we
estimate that the price of corn would have increased by 47.5 percent assuming no
growth in biofuel production in the United States, down from the actual increase of
61.7 percent, from April 2007 to April 2008. Assuming no growth in biofuel
production, the price of soybeans, soybean meal, and soybean oil in the global
food commodity price index would have increased by 54.2, 51.2, and 61.5 percent,
respectively, down from actual increases of 78.6, 69.3, and 80.9 percent,
respectively, from April 2007 to April 2008.
Table 3. Effects of biofuel production in the

United States on lobal food commodity prices
With Biofuels Without Biofuels

Percentage Change Percentage Change
Food 45.0 40.6
Corn (Maize) 61.7 47.5
Soybeans 78.6 54.2
Soybean Meal 69.3 51.2
Soybean Oil 80.9 61.5
Assuming no growth in biofuel production in the United States, the IMF

global food commodity price index would have increased by 40.6 percent, down
from the actual increase of 45.0 percent, from April 2007 to April 2008. Lower
corn prices contributed 1.2 percentage points, lower soybean, soybean meal, and
soybean oil prices contributed 3.2 percentage points to the total reduction in the
global food commodity price index.
However, combining soybeans, soybean meal, and soybean oil in the same
index overstates the impact of biofuels on global food prices. Soybeans are
processed into soybean meal and oil and by including the effects of biofuels on the
prices of all three commodities we magnify the impacts of biofuels on the global
food prices. If we exclude the impacts of biofuels on soybean meal and oil prices,
the IMF global food price index would have increased by 42.0 percent assuming no
growth in biofuels production in the United States, compared to the actual increase
of 45.0 percent from April 2007 to April 2008.

ON U.S. RETAIL FOOD PRICES
In 2007, the Consumer Price Index (CPI) for all food increased by 4.0
percent, up from 2.4 percent in both 2004 and 2005. In 2007, the retail price of
eggs increased by 29.2 percent, retail dairy product prices rose by 7.4 percent,
retail poultry prices posted a 5.2 percent gain, and retail beef prices increased by
4.4 percent. In 2008, the CPI for all food is projected to increase by 4.5 to 5.5
percent, with the retail prices of eggs, dairy products, fats and oils, and cereals and
bakery products all increasing by more than 5 percent.
It is very unlikely that the retail prices for dairy products, beef, poultry, and
eggs were greatly affected by higher corn and soybean prices in 2007. Higher
corn and soybean prices increase livestock and dairy producers’ feed costs. The
increase in feed costs, with no offsetting increase in livestock prices, reduces
livestock producers’ margins. Livestock producers react to these lower margins
over time by reducing the breeding herd. In the short term, higher feed costs
lead to an increase in livestock slaughter and lower livestock prices. For milk and
eggs, higher feed costs may have lowered production somewhat 2007, partially
contributing to the increase in retail prices for these food products. However,
other factors, such as low returns in 2006, strong demand, abnormally high
international prices, especially for dairy products, and increasing use of eggs for
hatching to expand broiler production likely contributed to the bulk of the increase
in retail food prices for these commodities in 2007.
The ratio of livestock prices relative to feed costs is a measure of the
pressure on livestock producers to adjust future production in response to higher
feed costs. In April, the steer and heifer corn price ratio (bushels of corn equal
in value to 100 pounds of steers and heifers, live weight) was the lowest since
August 1996, the hog-corn price ratio (bushels of corn equal in value to 100 pounds
of hog, live weight) was the lowest since December 1998, and the milk-feed price
ratio (pounds of 16 percent mixed dairy feed equal in value to 1 pound of milk)
and the broiler-feed price ratio (pounds of broiler grower feed equal in value to
1 pound of broiler, live weight) was the lowest since at least 1995.
In 2008, higher feed costs are likely to lead to lower prices for beef and pork as
producers react to higher feed costs by reducing the number of breeding
animals. In contrast, dairy producers react to higher feed costs by cutting back on
the number of dairy cows and adjusting rations. In 2008, higher feed costs are
expected to dampen the growth in milk production per cow but the dairy herd is
expected to continue to expand in response to strong milk returns in 2007.
To estimate the effects of growth in ethanol and biodiesel production on U.S.
retail food prices, we assume that all of the increase in prices for corn, other feed
grains, soybeans, soybean oil and soybean meal presented in Table 1 are passed on
to consumers through higher retail food prices. In 2007, the expansion in ethanol
and biodiesel production is estimated to have increased the CPI for all food by
0.10-0.15 percentage point. During the first four months of 2008, the all food CPI
increased by 4.8 percent, with increased ethanol and biodiesel production in the
U.S. accounting for about 0.20-0.25 percentage point of the increase in retail food
prices. Over time, livestock and dairy producers will adjust to higher feed costs by
reducing production leading to higher retail prices for animal products. In future
years, production adjustments by livestock and dairy producers in response to
higher feed costs resulting from the expansion in ethanol and biodiesel
production could add a total of 0.6-0.7 percentage point to the CPI for all food.
CONCLUSION
Many factors have converged to increase corn and soybean prices. Some of
these factors include domestic and global economic growth; global weather; rising
input costs for energy; international export restrictions; and new product markets,
particularly biofuels. At this time, the expansion in biofuel production in the United
States would appear to be a relatively modest contributor to food price inflation
globally and in the United States. Assuming no expansion in biofuel production in
the U.S., we estimate the IMF global food commodity price index would have
increased by over 40 percent from April 2007 to April 2008, compared with the
actual increase of 45 percent. In the U.S., the CPI for all food would have
increased by 4.55- 4.60 percent during the first four months of 2008, compared
with the actual increase of 4.8 percent, assuming no expansion in U.S. biofuel
production. In future years, production adjustments by livestock and dairy producers
in response to higher feed costs resulting from the expansion in ethanol and
biodiesel production could add a total of 0.6-0.7 percentage point to the CPI for all
food.
Mr. Chairman, that completes my statement.
Farm Prices for Crops, Livestock, and Livestock Products, 2006-08
2006 2007 2008P

Livestock
Steers ($/cwt) 85.41 91.82 89-93
Hogs ($/cwt) 47.26 47.09 46-48
Broilers ($/cwt) 64.4 76.4 80-83
Milk ($/cwt) 12.97 19.13 18.90-19.30
Eggs (cents/doz) 71.8 114.4 121-125
Crops 2005/06 2006/07 2007/08E
Wheat ($/bu) 3.42 4.26 6.50
Rice ($/cwt) 7.65 9.96 12.35-12.65
Corn ($/bu) 2.00 3.04 4.25-4.45
Soybeans ($/bu) 5.66 6.43 10.00
Prices Paid by Farmers for Selected Inputs, 2006-08.

Actual and Department of Energy, Energy Information Agency, Forecast of Corn-

Based Ethanol Production, 2000-16.
World Economic Growth, 2000-08.
Changes in Retail Food Price Indexes, 2006, 2007, and 2008 Forecast
Relative 2006 2007 Forecast

Importance 2008
All food 100.0 2.4 4.0 4.5 to 5.5
Food at home 55.4 1.7 4.2 5.0 to 6.0
Meats, poultry, fish 12.2 0.8 3.8 2.0 to 3.0
Eggs 0.9 4.9 29.2 10.0 to 11.5
Dairy products 6.4 -0.6 7.4 5.0 to 6.0
Fats and oils 1.5 0.2 2.9 10.5 to 11.5

Fruits and vegetables 8.4 4.8 3.8 3.5 to 4.5
Sugar and sweets 2.0 3.8 3.1 3.5 to 4.5
Cereals and bakery 7.4 1.8 4.4 7.5 to 8.5
products
Nonalcoholic 6.7 2.0 4.1 4.5 to 5.5
beverages
Other foods 9.9 1.4 1.8 3.0 to 4.0
Annual Percentage Change in the CPI for All Food and All Items, 1970-2007.
Broiler-Feed: Pounds of broiler grower feed equal in value to 1 pound of broiler, live
weight.
Hog-Corn: Bushels of corn equal in value to 100 pounds of hog, live weight.
Steer and Heifer-Corn: Bushels of corn equal in value to 100 pounds of steers weight.
Milk-Feed: Pounds of 16% mixed dairy feed equal in value to 1 pound of whole milk.
Broiler, Hog, Steer and Heifer, and Milk Feed Price Ratios, January 1997-May 2008.
Chapter 10
STATEMENT OF JOSEPH GLAUBER, BEFORE

THE JOINT ECONOMIC COMMITTEE, U.S.
CONGRESS, MAY 1, 2008
Mr. Chairman, members of the Committee, thank you for the opportunity to
discuss recent developments and prospects for retail food prices. In 2007, the
Consumer Price Index (CPI) for food in the U.S. increased by 4 percent. This was
the largest annual increase in retail food prices since 1990. In 2008, the
Department of Agriculture’s Economic Research Service (ERS) projects retail

food prices will increase by 4 to 5 percent. Several key factors are shaping the
current situation, including domestic and global economic growth; global
weather; rising input costs for energy; international export restrictions; and new
product markets, particularly biofuels. I will describe recent developments in
commodity markets, the effects on retail food prices, and the implications for food
price inflation, family food expenditures, and domestic food assistance.
RECENT DEVELOPMENTS IN COMMODITY MARKETS

Higher commodity prices are contributing to the increase in food price
inflation, even though, on average, the farm value accounts for only about 20 cents
of each dollar spent on food. For highly processed foods, such as cereal and bakery
products, the farm component of the retail value is less as processing costs account
for a higher portion of the retail value. In contrast, food products that undergo little
processing prior to being consumed, such as eggs and fresh fruits and vegetables, the
farm value accounts for a much larger share of the retail value.
The index of prices received by farmers for all products increased by 18

percent in 2007, as farm prices for several major crops, beef, milk, broilers, and
eggs either reached new record highs or posted large annual gains. Compared to
one year ago, the index of prices received by farmers for all products was up 15
percent during the first quarter of 2008. During the first quarter of 2008, the
prices received for all crops were up 20 percent, reflecting continued strong prices
for major crops. Meanwhile, the prices received for livestock and livestock
products, while up 10 percent during the first quarter compared to one year ago, have
moderated in recent months as record large supplies of red meat and poultry have
lowered farm prices for cattle and hogs.
Wheat & Coarse Grains
The CPI for cereal and bakery products increased 4.4 percent in 2007, and
is projected to rise 7.5-8.5 percent in 2008. The increase in the CPI for cereal and
bakery products reflects higher prices for wheat, rice, corn, and other grains as well
as higher marketing costs.
In marketing year 2007/08, domestic food use is projected to account for
nearly two- thirds of U.S. rice production, slightly less than 50 percent of U.S.
wheat production, and about 10 percent of U.S. corn production. The remaining
uses of wheat, rice, and corn include feed use, seed use, industrial use, primarily
biofuels, and exports. All of these different uses form the demand for these
commodities along with production, imports, and beginning and ending stocks to
determine the farm prices of wheat, rice, and corn.
The 2007/08 wheat market reflects a third straight year in which global
production has fallen short of consumption, driving expected world stocks to
their lowest level in 30 years. Back-to-back years of lower production in the
major exporting countries, including Australia, Canada, and the European Union
have combined with below-trend yields in the United States to reduce the
availability of exportable supplies. Tight supplies in competitor countries and
restrictions on exports in major producing countries such as Argentina, Ukraine,
and Russia have boosted export demand for U.S. wheat. U.S. ending stocks are
projected at their lowest level in 60 years. As a consequence, wheat prices have
increased to record levels. Farm prices for 2007/08 are projected at a record
$6.55-$6.75 per bushel, sharply higher than last year’s $4.26 and the previous
record of $4.55 per bushel.
Wheat producers indicated in March they intend to plant 63.8 million acres in
2008, up 6 percent from 2007. Yield prospects for the 2008 crop remain mostly
favorable, but persistent dryness remains a concern in the southwestern

portions of the hard red winter wheat belt in western Kansas and the panhandle
areas of Texas and Oklahoma. In addition to higher production in the U.S.,
wheat production in other major wheat producing countries is expected to rise
sharply as planted area is up around the world, spurred by record prices and
encouraged by favorable fall sowing weather. If trend yields are achieved, world
production could set a new record, rising as much as 50 million tons from 2007/08.
Global production is expected to exceed global consumption for the first time in
four years leading to some recovery in global wheat stocks. Nonetheless, the
average farm price is projected to increase in 2008/09, supported by forward
sales made at prices well above last year’s level. Cash wheat prices during the
first quarter of the marketing year are also expected to be supported by strong
competition between domestic mills and foreign buyers.
The U.S. corn market in 2007/08 is characterized by record production and
farm prices driven by strong domestic and export demand, which is boosting use
to record levels. U.S. producers planted 93.6 million acres to corn in 2007, the
largest plantings since 1944. Domestic use for 2007/08 is estimated at a record
10.6 billion bushels, up 1.5 billion or 17 percent from last year. Ethanol use,
projected at 3.1 billion bushels, is expected to surpass exports for the first time
ever, accounting for 24 percent of total corn use. Despite high prices, export
demand remains strong with growing world demand for animal protein and tight
supplies of feed quality wheat, particularly in the European Union. Exports are
projected at a record 2.5 billion bushels, up 18 percent from last year. The farm-
level price of corn for 2007/0 8 is expected to average a record $4.10-4.50 per
bushel, up substantially from $3.04 per bushel in 2006/07.
Corn prices are expected to rise again in 2008/09, with the Department
releasing an official forecast on May 9. Demand is expected to remain strong,
supported by expanding use for ethanol. Corn area and production are expected
to be lower in 2008/09 as record soybean prices and high input costs for corn
encourage a rebound in soybean plantings. Producers indicated in March they
intend to plant 86.0 million acres of corn in 2008, down 8 percent from last year.
In addition, cool, wet weather has slowed planting progress, which could also
contribute to lower corn plantings in 2008. With higher use and lower production,
ending stocks are expected to decline, keeping upward pressure on prices.
Rice
Tighter domestic rice supplies, higher global rice prices, and higher grain
and oilseed prices have helped to boost rice prices in 2007/08. Producers in much
of the South cut back on rice area in 2007 because they could earn higher returns
by planting alternative crops such as wheat, corn, sorghum and soybeans. Exports
in 2007/08 are projected to increase 23 percent to 112 million hundredweight
(cwt). Larger exports are expected to markets in the Western Hemisphere,
Europe, and the Middle East. Tight global supplies and self-imposed export
bans in Egypt, Vietnam, and India are helping to support U.S. exports. Rice
ending stocks are forecast at 21.6 million cwt, down from carry-in stocks of 39
million cwt. The season- average farm price is forecast at $12.05-$12.35 per
cwt, up from $9.96 in 2006/07 and the highest since 1980/81. Rice prices in
2008/09 are expected to be higher than 2007/08 due to tighter domestic and
global supplies and higher world prices.
Soybeans
The CPI for fats and oils increased 2.9 percent in 2007. In 2008, the CPI
for fats and oils is expected to increase by 8-9 percent. The primary domestic
oil in this CPI category is soybean oil. Strong soybean oil exports and
increased use of soybean oil for biodiesel production have pushed up the price of
soybean oil. In addition, higher transportation, labor, and other marketing costs
are contributing to the increase in retail prices for fats and oils.
U.S. soybean prices are record high this year, reflecting lower production
and strong demand. The farm price received for soybeans is expected to average
$10.00-$10.50 per bushel during 2007/08, compared with $6.43 last marketing
year and the previous record of $8.73 per bushel set in 1983/84. Lower production
was brought about by sharply lower planted area as producers shifted some
soybean acres to corn in 2007. Lower stocks are projected in part due to strong
export demand for U.S. soybeans resulting from record imports by China and
limited growth in South American supplies despite high prices.
U.S. soybean crush is also a contributing factor to declining stocks as foreign
demand for U.S. soybean meal remains exceptionally strong. Wheat shortages in
many parts of the world are leading to strong export demand for soybean meal
protein which can be used to replace wheat in feed rations. Soybean crush is also
supported by growing demand for biodiesel, production of which is expected to
account for 14 percent of total soybean oil use for 2007/08. The prices of both
soybean meal and soybean oil are up sharply in 2007/08. The price of soybean
meal is projected to average $315-$335 per ton in 2007/08, up from $205 per
ton in 2006/07 and the price of soybean oil is projected to average 50-54 cents
per pound, compared with 31 cents per pound in 2006/07.
U.S. producers indicated in March they intend to plant 74.8 million acres to
soybeans in 2008, up 18 percent from last year. If these intentions are realized,
soybean supplies for 2008/09 could increase as larger production more than
offsets sharply lower beginning stocks. Reflecting the increase in projected
soybean production, soybean ending stocks are expected to rebound in 2008/09
from this year’s very low level. Forward sales at prices above last year’s
average and high corn prices are likely to push soybean prices higher in
2008/09.
Retail prices for fruits and vegetables increased 3.8 percent in 2007, as
fresh fruit and vegetable prices rose by 3.9 percent and processed fruit and
vegetable prices rose by 3.6 percent. Price spikes in these commodities are
often linked to drought or freeze damage. In 2008, the CPI for fruits and
vegetables is projected to increase by 3-4 percent.
Livestock and Poultry
The CPI for meat, poultry and fish increased by 3.8 percent in 2007 and is
forecast to increase by 2-3 percent in 2008. In 2007, prices were particularly
strong for cattle and broilers. These strong prices generally reflected production
adjustments made prior to the recent increase in feed costs. U.S. production of meat
and poultry is expected to be a record 94 billion pounds in 2008. This large supply
of meat is expected to limit gains in prices for cattle, hogs, broilers, and turkeys in
2008. In addition, the demand for red meat and poultry could be affected by
consumers’ economic concerns.
Beef production is currently forecast to increase by 0.6 percent in 2008 due to
continued strong cow slaughter. Drought conditions in the Southeast led to
strong increases in cow slaughter last year and, even with a return to normal
weather in 2008, cow slaughter is expected to remain relatively high in 2008. The
January Cattle report indicated the cow herd continued to contract during 2007.
Beef cow numbers were estimated about 0.6 percent lower than a year ago, and
the number of beef cows expected to calve was down 1 percent. In addition,
the number of beef heifers to be retained for the breeding herd was down 3.5
percent. Nebraska Direct steer prices averaged a record $91.82 per cwt in 2007
but are expected to decline slightly in 2008 to average $88-$92 per cwt.
Pork production in 2008 is expected to increase 7 percent due to expansion
triggered by positive returns to producers in 2006 and 2007 and strong
productivity gains. However, the growth in production is expected to slow later
in the year as producers respond to much higher feed costs. The most recent
Quarterly Hogs and Pigs report indicated that producers farrowed 5 percent more
sows during December 2007-February 2008, but intend to farrow 2 percent fewer
sows during June 2008-August 2008. The strong increase in pork production has
pressured hog prices in recent months. In 2008, hog prices are expected to
decline from 2007’s $47.09 per cwt to $40-42 per cwt.
Broiler producers reacted to low returns in 2006 and pulled back broiler
production during the last two quarters of 2006 and the first two quarters of
2007. As broiler prices hit record levels in mid-2007, broiler producers responded
by expanding production. Since last fall, weekly estimates of chicks placed for
growout were consistently 3 to 5 percent above a year earlier, but the increase in
placements has dropped below 3 percent in recent weeks. However, little to no
expansion in broiler production is expected during the second half of 2008 as
producers respond to higher corn and soybean meal prices. Broiler prices for
2008 are forecast to average 78 to 82 cents per pound in 2008, compared with
a record 76.4 cents in 2007.
U.S. red meat and poultry exports are expected to reach a record 12 billion
pounds in 2008. Pork exports are again forecast to lead the way, increasing for the
18th consecutive year to 3.7 billion pounds carcass weight, which is equal to 16
percent of production.
In 2007, broiler exports recovered from a couple of years of sluggish sales and
reached a record 5.8 billion pounds on strong sales to Canada, China, and Russia.
Broiler exports are expected to increase to 6.0 billion pounds in 2008. Beef
exports are expected to increase to about 1.5 billion pounds in 2008, still well
below the 2003 pre-bovine spongiform encephalopathy level of 2.5 billion pounds.
A variety of markets expanded access to U.S. beef recently, but beef exports are still
hampered by Japan’s age limits on imported beef from the United States and
other continuing restrictions on foreign markets.
Eggs
The CPI for eggs rose by 29 percent in 2007 and projected to increase by 3-
4 percent in 2008. In 2007, table-egg producers cut production. The decision to
reduce production likely took place prior to the recent run-up in feed costs.
In 2007, the wholesale price for a dozen grade A large eggs in the New
York market averaged $1.14 per dozen, 43 cents higher than the previous year.
The strong increase in egg prices reflected lower production and strong
domestic demand. In 2007, table-egg production was down 1 percent, as
producers lowered production in order to increase the hatching-egg flock.
Given the current size of the table-egg flock and the number of birds
available to add to the flock, no significant expansion in production is expected
before the second-half of 2008. Wholesale table-egg prices (New York area)
averaged $1.59 per dozen in the first-quarter, up 51 percent from the previous year.
Prices are expected to decline seasonally in the second quarter and average
$1.25-$1.32 per dozen in 2008.
Milk
The CPI for dairy products increased by 7.4 percent in 2007 and is projected to
increase by 3-4 percent in 2008. Very strong international dairy product prices, robust
domestic demand and modest expansion in domestic production in response to
very low milk prices in 2006 were the primary factors pushing up dairy
product prices in 2007. The recent increase in feed costs probably had only a
minimal effect on milk production in 2007.
Although higher feed costs are expected to temper later-year expansion
plans, milk producers are expanding herds in response to generally favorable returns
during much of 2007. Production in 2007 increased about 2 percent as the herd
increased fractionally. Milk per cow increased but lagged its historical growth.
Driven by strong domestic demand and sharply higher international prices in
response to declining milk production in Australia due to drought and limited
surpluses of dairy products in the European Union, the all-milk price averaged a
record $19.13 per cwt, over $6.00 above 2006. Cow numbers are expected to
increase further in 2008 but high feed costs may slow the growth in milk per
cow. Milk production in 2008 is expected to increase 2.4 percent. Demand for
dairy products, both domestically and for export, may lag production growth,
resulting in weaker prices in 2008. The all-milk price for 2008 is forecast to decline
to between $17.65 and $18.15 per cwt.
KEY FACTORS BEHIND THE INCREASE

IN RETAIL FOOD PRICES
As the above discussion suggests, many factors have converged to increase

commodity prices. I will now review some of these factors.
Global economic growth, weather problems in some major grain producing
countries, and depreciation in the trade weighted-dollar helped boost FY 2008
U.S. agricultural exports. In FY 2008, the value of U.S. agricultural exports is
projected to reach a record $101 billion, up from last year’s record of $81.9
billion.
Global economic growth is boosting global demand for food. Real foreign
economic growth declined in 2007 to 4.0 percent from 2006’s robust rate of 4.2
percent. Foreign economic growth is expected to be 3.9 percent in 2008, down
slightly from 2007, but well above trend, as has been the case beginning in
2004 (ERS). Asia, excluding Japan, will likely grow at over 7 percent in 2008,
above trend for the fifth consecutive year. Higher incomes are increasing the
demand for processed foods and meat in rapidly growing developing countries, such
as India and China. These shifts in diets are leading to major changes in
international trade. For example, China’s corn exports are projected to fall from
5.3 million metric tons in 2006/07 to 0.5 million metric tons in 2007/08, as more
corn is used for domestic livestock feeding.

Agricultural production depends on the weather. The multi-year drought
in Australia reduced wheat and milk production and that country’s exportable
supplies of those commodities. Drought and dry weather have also adversely
affected grain production in Canada, Ukraine, European Union, and the United
States. Thus, weather events have helped to deplete world grain stocks. With world
stocks for wheat at a 30-year low, grain importers are increasingly turning to
the U.S. for supplies. Furthermore, the tight stocks situation is leading to
increasing concerns that prices could move sharply higher if this year’s harvest
falls below expectations. These concerns are causing some importers to
purchase for future needs, pushing prices higher.
Many exporting countries have put in place export restrictions in an effort to
reduce domestic food price inflation. The United Nations FAO recently noted
the cereal import bill of the world’s poorest countries is forecast to rise by 56
percent in 2007/2008, which comes after a significant increase of 37 percent in
2006/2007. Exporting countries as diverse as Argentina, China, India, Russia,
Ukraine, Kazakhstan, and Vietnam have placed additional taxes or restrictions
on exports of grains, rice, oilseeds, and other products. By reducing supplies
available for world commerce, these actions only exacerbate the surge in global
commodity prices. Export restrictions are ultimately self-defeating, reducing the
incentives for producers to increase production.
Higher food marketing, transportation, and processing costs are also
contributing to the increase in retail food prices. Record prices for diesel fuel,
gasoline, natural gas, and other forms of energy affect costs throughout the food
production and marketing chain. Higher energy prices increase producers’
expenditures for fertilizer, chemicals, fuel, and oil driving up farm production
costs. Higher energy prices also increase food processing, marketing, and
retailing costs. These higher costs, especially if maintained over a long period,
tend to be passed on to consumers in the form of higher retail prices. ERS
estimates direct energy and transportation costs account for 7.5 percent of the
overall average retail food dollar. This suggests that for every 10 percent
increase in energy costs, the retail food prices could increase by as much as 0.75
percent if fully passed on to consumers.
In recent years, the conversion of corn and soybean oil into biofuels has
been an important factor shaping major crop markets. The amount of corn
converted into ethanol and soybean oil converted into biodiesel nearly doubled from
2005/06 to 2007/08. The growth in biofuels production has coincided with rising
prices for corn, soybeans, soybean meal, and soybean oil. From 2005/06 to
2007/08, the farm price of corn more than doubled and the price of soybeans
nearly doubled.
While much of the increase in the farm prices for corn and soybeans can be
attributed to increased biofuels production, other factors have also contributed to
the sharp increase in prices for these commodities. The strength in exports
resulting from global economic growth and drought and dry weather in some
major grain producing countries has boosted prices for corn and soybeans. For
example, corn exports are projected to reach 2.5 billion bushels in 2007/08, up
from 2.1 billion bushels in 2005/06, and soybean exports are projected to
increase by 14 percent over the same period.
The recent increase in corn and soybean prices appears to have little to do with
the run-up in prices of wheat and rice prices. Corn and soybean prices began
increasing during the fourth quarter of 2006. By this time, producers had
already planted the 2007 winter wheat crop. Rice and spring wheat plantings
could have been affected by increasing corn and soybean prices but weather
problems, low stocks, and strong global demand likely had a much greater
impact on wheat and rice prices than increasing corn and soybean prices. In
2008, U.S. wheat producers indicate they intend to plant more acreage to wheat
while rice acreage is projected to remain flat, suggesting that higher corn and soybean
prices have not greatly altered wheat and rice producers’ planting decisions.
It is unlikely that retail prices for milk, meat, poultry, and eggs were greatly
affected by higher corn and soybean prices in 2007. Higher corn and soybean
prices increase livestock and dairy producers’ feed costs. The increase in feed
costs, with no offsetting increase in livestock prices, reduces livestock
producers’ margins. Livestock producers react to these lower margins over
time by reducing the breeding herd. In the short term, higher feed costs lead to
an increase in livestock slaughter and lower livestock prices. For milk and eggs,
higher feed costs may have lowered production somewhat 2007, partially
contributing to the increase in retail prices for these food products. However, as
pointed out earlier, other factors (weather, low returns, strong demand, etc.)
contributed to the bulk of the increase in retail food prices for these commodities
in 2007.
In 2008, higher feed costs are likely to lead to lower prices for livestock as
producers react to higher feed costs by reducing the number of breeding
animals. In contrast, dairy producers react to higher feed costs by cutting back on
the number of dairy cows and adjusting rations. In 2008, higher feed costs are
expected to dampen the growth in milk production per cow but the dairy herd is
expected to continue to expand in response to strong milk returns in 2007.
RETAIL FOOD PRICE REVIEW AND OUTLOOK

There is a cyclical pattern to retail food price inflation. For example, in 2000,
we were experiencing year over year monthly increases in the all food price
index of 1.5 to 2.5 percent. During 2001 and early 2002, the year over year
monthly increases in the all food price index ranged from 2.5 to 3.5 percent
before falling to 1.0 to 1.5 percent by mid 2002 through mid 2003. In the
middle of 2004, the all food price index increased by 4 percent before dropping
to less than 2.5 percent by mid 2005. Our most recent increase in the rate of food
price inflation began in early 2007. From March 2005 to March 2006, the all food
price index increased by 2.6 percent. In contrast, the all food price index increased
by 3.3 percent from March 2006 to March 2007 and from March 2007 to March
2008, the all food price index increased by over 4.5 percent.
The CPI for food away from home is projected to increase by 3.5 to 4.5 percent
in 2008, slightly higher than the 3.6-percent increase in 2007. Prices for food
away from home are largely determined by processing, transportation, and

marketing costs which are subject to volatile energy costs and trend inflation.
The CPI for food at home is projected to increase by 4 to 5 percent in
2008 compared to 4.2 percent in 2007. While the forecasted change in the
price for food at home in 2008 is similar to 2007, the food categories
contributing to food price inflation are different. In 2007, the retail price of eggs
increased 29 percent, retail dairy product prices rose by over 7 percent and the
retail price of poultry posted a more than 5 percent gain. These three product
categories accounted for over 35 percent of the annual increase in the CPI for
food at home. In addition, retail prices for beef, pork, cereal and bakery products,
and nonalcoholic beverages increased by nearly 4 percent or more in 2007.
In 2008, retail prices for only three product categories are projected to
increase by 4 percent or more. These product categories include: fats and oils up
8 to 9 percent, cereals and bakery products up 7.5 to 8.5 percent, and nonalcoholic
beverages up 3.5 to 4.5 percent. In total, cereal and bakery products, fats and
oils, and nonalcoholic beverages have a weight of 16 percent in the all food
CPI and 28 percent in the food at home CPI.
Higher corn and soybean prices have contributed to increases in the retail
prices of cereal and bakery products and fats and oils. In addition, higher corn
prices have increased the price of high fructose corn syrup, an ingredient in soft
drinks and many other products. In 2007, the CPI for these three retail food
product categories increased, on average, by 4.1 percent and is projected to
increase by 6.3 percent in 2008. If we assume a normal price increase in these three
retail product categories of 2.5 percent, the food at home CPI would have been
about 0.4-0.5 percentage points lower in 2007 and the forecast for 2008 would be
about 1 percentage point lower. These figures overstate the contribution of higher
corn and soybean prices to the CPI for food at home, since higher prices for other
commodities may also be contributing to above average increases in retail prices
for cereal and bakery products, fats and oils, and nonalcoholic beverages.
The Department’s current long-term projections indicate that retail food
price inflation will gradually moderate over the next several years. Continued
expansion of biofuels production will likely maintain corn and soybean prices at
historically high levels and livestock producers will adjust to the increase in feed
costs by reducing production, leading to higher retail prices for beef and pork in
the longer term. In contrast, future upward movements in retail dairy product
prices may be limited following the strong increase in 2007. In addition,
global agricultural production is expected to rebound, especially for wheat,
relieving some of the pressure on retail food prices for cereal and bakery
products. Of course, future increases in retail food prices depend heavily on energy
prices and other food marketing costs.
IMPACTS ON CONSUMERS
In 2006, consumers spent $551 billion on food consumed at home, almost 6
percent of their total disposable personal income. They spent an additional
$396 billion, about 4 percent of their disposable personal income, on food
consumed away from home. In total, consumers spent almost $950 billion, almost
10 percent of their disposable personal income on food in 2006.
More important than the overall impact higher food prices may have on
the share of income allocated for food expenditures are the distributional
impacts of higher food prices. While consumers, on average, may spend only 10
percent of their disposable income on food, families with less than $20,000 in
income spend over 20 percent of their after-tax income on food. Thus, a 4-
percent increase in retail food prices would increase the share of income spent
on food for families with less than $20,000 in income by about 1 percentage
point.
IMPACTS ON DOMESTIC FOOD PROGRAMS

The Department’s food programs, including the Food Stamp Program, the WIC
program, child nutrition programs, and purchases for food banks and food pantries,
are affected by higher retail food prices. The Department is monitoring the
programs closely, and at a recent Senate Appropriations hearing, Secretary Schafer
outlined the Department’s budget requests for these programs, which take higher
food prices into account.
Higher food prices are driving up costs of the Food Stamp Program, which is
managed based on the value of the “Thrifty Food Plan,” a low-cost market basket
of foods that provides a diet consistent with dietary guidelines. Food Stamp
Program benefits are indexed to annual changes in the cost of the Thrifty Food
Plan. Higher food costs will increase the average benefit, adding to program
costs. In addition, the slowdown in the U.S. economy could increase program
participation. Therefore, the Department has requested an additional $1.8 billion
for the Food Stamp Program for FY 2009.
Unlike the Food Stamp Program, the WIC program is discretionary and
spending depends on annual appropriations. WIC costs go up when food prices go
up, regardless of the cause. If food costs go up and there is no corresponding
increase in appropriations, program participation is adversely affected. WIC costs
jumped in 2007 due to strong increases in retail prices for dairy products and eggs
and are running higher each month in 2008 than in the same month in 2007. The
Department has requested $6.1 billion for WIC for FY 2009, the highest request
ever.
Federal payments for school breakfasts and lunches are indexed every July to
food-price changes reflected in the “Food Away From Home” component of the
CPI over the 12-month period ending each May. The increases in the index have
resulted in annual increases in program costs of about 3 percent in recent years.
There have also been concerns expressed about the Department’s funding
for purchases of commodities for The Emergency Food Assistance Program
(TEFAP). Recently, The Department implemented a “Stocks-for-Food”
initiative, whereby the Department barters Government–owned commodities
such as wheat, corn, and soybeans for processed foods suitable for distribution in
domestic and international food programs. States are distributing these
products, such as canned vegetables, vegetable oils, peanut butter, and canned
meats, to thousands of local agencies, including food banks, soup kitchens and
food pantries. The donated food products can supplement millions of meals for
low income Americans.
CONCLUSION
Futures market prices suggest that grain and oilseed prices will remain high
over the next few years. The rapid expansion of biofuel production, high input
costs, and strong foreign demand will continue to play a major driving force in
U.S. and world agriculture. Yield growth and supply response both in the U.S.
and abroad will help moderate crop prices in the long run, but for the near
term, tight supplies will keep markets volatile with much attention paid to
growing conditions worldwide.
Mr. Chairman, that completes my statement.
Farm Prices for Crops, Livestock,

and Livestock Products, 2006-08
2006 2007 2008F

Livestock
Steers ($/cwt) 85.41 91.82 88-92
Hogs ($/cwt) 47.26 47.09 40-42
Broilers ($/cwt) 64.4 76.4 78-82
Milk ($/cwt) 12.97 19.13 17.65-18.15
Eggs (cents/doz) 71.8 114.4 125-132
Crops 2005/06 2006/07 2007/08F
Wheat ($/bu) 3.42 4.26 6.55-6.75
Rice ($/cwt) 7.65 9.96 12.05-12.35
Corn ($/bu) 2.00 3.04 4.10-4.50
Soybeans ($/bu) 5.66 6.43 10.00-10.50
Soybean Oil (cents/lb) 23.41 31.02 50.00-54.00
Prices Paid by Farmers for Selected Inputs, 2006-08.
World Economic Growth, 2000-08.

Annual Percentage Change in the CPI for All Food and All Items, 1970-2007.
Food Spending by Income Class, 2006
Income Income after Food at Food away Total Food Total Food
Category taxes home from home Expenditure Expenditures
$ per $ per $ per $ per % of income
consumer consumer consumer consumer after taxes
unit unit unit unit
All 58,101 3,417 $2,694 $6,111 10.5
Less than 316 1,802 1,246 3,049 na
$5,000
$5,000 to 8,019 1,894 966 2,860 35.7
$9,999
$10,000 to 12,630 2,159 940 3,099 24.5
$14,999
$15,000 to 17,411 2,476 1,155 3,631 20.9
$19,999
$20,000 to 24,743 2,605 1,531 4,136 16.7
$29,999
$30,000 to 33,916 2,719 1,970 4,689 13.8
$39,999
$40,000 to 43,573 3,061 2,269 5,330 12.2
$49,999
$50,000 to 57,358 3,603 2,892 6,496 11.3
$69,999
$70,000 and 119,298 4,798 4,502 9,300 7.8
more
Source: U.S. Department of Labor. Bureau of Labor Statistics. Consumer Expenditure
Survey.
INDEX
algae, 175
A alternative, 33, 35, 111, 182, 188, 205
AMS, 29
access, 110, 119, 150, 159, 208
analysts, 9, 31, 158
accounting, 39, 43, 45, 46, 49, 94, 182, 194,
anger, 107
204
animals, 70, 194, 213
acute, 158
Apples, 157
administrative, 159
appropriations, 132, 133, 147, 217
advertising, 127, 146
Arabia, 46
Africa, 42, 44, 46, 98, 99, 107, 119, 125, 147,
Argentina, 41, 42, 49, 50, 88, 99, 102, 141,

171
179, 181, 203, 211
age, 31, 208
ash, 17
aggregate demand, 162
Asia, 32, 38, 42, 44, 47, 77, 80, 125, 138, 143,
agricultural, 1, 2, 3, 4, 6, 7, 9, 10, 11, 16, 19,
171, 178, 210
23, 25, 26, 27, 28, 29, 32, 33, 34, 35, 37,
Asian, 31, 44, 50, 100, 120, 143, 163
38, 41, 51, 52, 59, 63, 68, 69, 72, 73, 74,
Asian countries, 100, 143
76, 77, 78, 85, 87, 97, 108, 109, 110, 111,
Asian crisis, 32
113, 114, 117, 118, 119, 121, 126, 145,
assets, 152, 159
147, 169, 170, 171, 174, 178, 189, 210, 215
assumptions, 111
agricultural commodities, 2, 4, 7, 16, 23, 26,
Atlantic, 9
29, 32, 34, 37, 51, 69, 74, 76, 85, 97, 119,
Australia, 38, 41, 98, 99, 118, 125, 138, 143,
147, 170, 178, 189
179, 181, 186, 203, 209, 211
agricultural crop, 3, 32, 33
availability, 24, 36, 43, 99, 119, 120, 181, 203
agricultural exports, 28, 178, 210
averaging, 137
agricultural market, 2, 4, 7, 11, 23, 33, 37, 41,
109
agricultural residue, 174 B
agricultural sector, 10, 35, 59, 111
agriculture, 73, 113, 115, 116, 187, 218 baking, 7, 34, 35, 39, 140
aid, 19, 58, 63, 65, 105, 106, 133, 147, 154 balance sheet, 30
alcohol, 43 bananas, 69, 128, 189
170 Index
Bangladesh, 107 by-products, 40, 140

banks, 216, 217
barges, 8
barley, 9, 22, 23, 24, 35, 40, 41, 43, 55, 58, C
93, 99, 189
calorie, 119
barriers, 6, 8, 85, 111
Cambodia, 103
basic research, 174
Cameroon, 107
beef, 83, 84, 180, 184, 189, 193, 194, 202,
Canada, 9, 38, 41, 53, 88, 115, 125, 138, 140,
207, 208, 214, 215
179, 181, 203, 208, 211
behavior, 13, 15, 33, 36
Canadian Wheat Board, 10
benchmarks, 19
capacity, 25, 38, 41, 50, 88, 106, 109, 159,
benefits, ix, 124, 130, 132, 158, 159, 216
166
beverages, 198, 214, 215
Capitol Hill, 165
binding, 51
carbohydrates, 7, 175
biodiesel, 88, 94, 114, 117, 183, 186, 187,
carbon, 174, 175
188, 191, 194, 195, 205, 206, 212
category a, 25
bioethanol, 118
cation, 78
biofuel, 68, 74, 94, 114, 115, 117, 118, 119,
cattle, 15, 34, 38, 44, 51, 181, 184, 202, 207
121, 191, 192, 195, 218
CCC, 59
biofuels, 37, 67, 68, 88, 91, 94, 108, 109, 114,
CEA, 191
115, 116, 117, 118, 119, 120, 121, 138,
cellulosic, 173, 174
169, 170, 173, 174, 175, 177, 186, 187,
cellulosic ethanol, 173, 174
188, 191, 192, 195, 201, 203, 212, 215
Census, 3, 25, 27, 59, 62
biomass, 114, 173, 174, 175
Census Bureau, 25, 27, 62

biorefinery, 173, 174, 175
central bank, 161
biotechnology, 110, 169
cereals, 25, 39, 114, 139, 145, 193, 214
birds, 185, 209
CFTC, 60
Black Sea, 41
chemicals, 174, 211
blame, 174
chicken, 83
borrowing, 152
chickens, 84
bovine, 208
chicks, 185, 208
bovine spongiform encephalopathy, 208
child nutrition programs, 132, 216
Brazil, 42, 48, 49, 50, 88, 89, 94, 117
children, 120, 131, 150, 155
Brazilian, 94, 126, 163
China, 38, 41, 42, 45, 46, 47, 49, 52, 77, 80,
breakfast, 25, 39, 127, 140
85, 88, 94, 100, 102, 115, 125, 138, 143,
breeding, 184, 193, 194, 207, 213
170, 178, 179, 183, 205, 208, 210, 211
broilers, 128, 180, 202, 207
classes, 38, 39, 138, 139, 161
bubble, 162, 163
climate change, 74, 110, 113, 115
bubbles, 163
coconut, 48, 94
Buenos Aires, 52
collaboration, 23
buffer, 85
collusion, 6
Burkina Faso, 107
combined effect, 189
burning, 91
commerce, 179, 211
butyl ether, 91, 98
Committee on Homeland Security, 122
buyer, 8, 39, 64, 139, 167
Index 171
commodity, ix, 1, 2, 3, 4, 5, 6, 7, 8, 10, 11, 12, cooking, 45

13, 14, 16, 18, 19, 20, 22, 23, 24, 25, 26, corn, ix, 1, 3, 8, 9, 13, 15, 17, 21, 22, 23, 24,
27, 30, 31, 32, 33, 34, 35, 36, 37, 49, 54, 26, 29, 31, 34, 35, 40, 41, 42, 43, 44, 58,
59, 61, 62, 64, 67, 69, 70, 71, 74, 97, 101, 60, 62, 64, 69, 71, 88, 91, 93, 94, 98, 99,
104, 105, 106, 108, 109, 110, 111, 123, 102, 104, 105, 114, 118, 119, 123, 124,
127, 131, 133, 144, 145, 146, 151, 152, 125, 127, 128, 133, 140, 141, 144, 164,
157, 161, 164, 165, 166, 170, 174, 177, 170, 171, 173, 174, 177, 178, 182, 183,
178, 179, 180, 189, 191, 192, 195, 201, 184, 185, 186, 187, 188, 189, 191, 192,
202, 210, 211 193, 194, 195, 199, 202, 204, 205, 206,
commodity futures, 1, 2, 3, 6, 12, 59 208, 210, 212, 213, 215, 217
Commodity Futures Trading Commission corporations, 11
(CFTC), 59 correlation, 30
commodity markets, 1, 2, 4, 12, 32, 49, 97, costs, ix, 2, 6, 8, 9, 14, 16, 37, 39, 41, 68, 74,
177, 201 97, 105, 106, 107, 108, 109, 110, 117, 121,
comparative advantage, 118 123, 124, 127, 128, 129, 131, 132, 133,
competition, 2, 7, 41, 117, 141, 144, 181, 204 139, 145, 146, 149, 150, 151, 167, 174,
competitive markets, 8 177, 179, 180, 182, 184, 185, 186, 188,
competitiveness, 5, 118, 127 191, 193, 194, 195, 201, 202, 204, 205,
competitor, 23, 32, 47, 181, 203 207, 209, 211, 213, 214, 215, 216, 217, 218
complement, 8, 12 costs of production, 68, 97, 108
components, 8, 30, 34, 43 cotton, 1, 3, 7, 9, 16, 17, 19, 21, 22, 23, 28,
computing, 164 29, 34, 46, 47, 48, 55, 56, 63, 65
Congress, iv, viii, 26, 48, 64, 133, 151, 158, coverage, 58
159, 170, 174, 175, 201 covering, 19, 159
Congressional Budget Office, 159 cows, 184, 194, 207, 213

consensus, 111 CPI, 124, 128, 129, 131, 134, 135, 148, 151,
conservation, 10 152, 154, 155, 184, 193, 194, 195, 198,
constraints, ix, 110, 114, 124, 149, 151, 152, 201, 202, 205, 206, 207, 208, 209, 214,
158 215, 217, 220
construction, 26 credit, 48, 63, 110
consumer expenditure, 16 crop drying, 127
Consumer Expenditure Survey, 135, 221 crop insurance, 28, 62
Consumer Price Index, 124, 151, 193, 201 crop markets, 186, 212
consumers, 34, 36, 71, 72, 76, 101, 103, 104, crop production, 4, 28, 33, 61, 74, 94, 98, 111
105, 106, 119, 124, 127, 129, 146, 151, crops, 2, 3, 6, 9, 10, 11, 19, 20, 21, 22, 23, 25,
180, 189, 194, 212, 216 28, 29, 30, 31, 32, 33, 40, 41, 48, 54, 55,
consumption, 2, 6, 36, 45, 47, 50, 51, 69, 70, 56, 57, 58, 70, 71, 73, 86, 94, 110, 114,
76, 83, 84, 85, 100, 104, 116, 119, 125, 117, 118, 125, 140, 144, 174, 180, 182,
130, 138, 142, 146, 150, 151, 153, 166, 188, 202, 205
181, 203 CRS, 1, 54, 59, 62, 63, 64, 65, 123, 134, 137,
contract prices, 13, 17, 29, 60, 138 147, 148
contracts, 2, 6, 12, 13, 16, 17, 18 crude oil, 71, 74, 85, 86, 127, 135, 166, 167,
control, 141 175
conversion, 83, 94, 186, 212 CT, 53
conversion rate, 83 cultivation, 35, 117, 118
172 Index
currency, 32, 63, 85 dietary, 216

cycles, 163, 164 diets, 76, 125, 129, 133, 178, 210
Czech Republic, 81 differentiation, 5
discounts, 12, 17, 34, 39, 54, 140
discretionary, 130, 132, 151, 217
D discretionary programs, 130
disposable income, 216
dairy, 15, 19, 44, 51, 76, 128, 132, 186, 193,
dispute settlement, 48
194, 195, 199, 209, 213, 214, 215, 217
distribution, 103, 126, 147, 166, 171, 217
dairy products, 76, 128, 186, 193, 209, 217
diversity, 24
Dallas, 164
division, 169
danger, 163
Doha, 48, 51
data collection, 61
domestic demand, 24, 185, 186, 209
database, 94
donations, 105, 106, 131
decisions, 5, 7, 10, 28, 33, 34, 36, 85, 104,
donors, 106
188, 213
drinking, 98
deficiency, 120
drinking water, 98
deficit, 7, 13, 50, 52
drought, 57, 98, 99, 124, 125, 140, 143, 170,
deflation, 163
171, 179, 184, 186, 187, 206, 207, 209,
delivery, 2, 12, 13, 14, 17, 29, 54, 60, 98, 147,
211, 212
167
droughts, 98
demand, ix, 2, 3, 4, 6, 7, 8, 9, 10, 11, 14, 15,
drying, 127
16, 18, 19, 20, 23, 24, 25, 26, 28, 30, 31,
DuPont, 173, 174, 175
32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42,
duties, 141
44, 45, 47, 48, 50, 51, 67, 68, 69, 72, 74,
76, 77, 78, 83, 85, 91, 93, 97, 98, 104, 108,
109, 113, 117, 118, 119, 123, 125, 126, E
128, 129, 138, 142, 144, 162, 163, 164,
170, 174, 178, 181, 182, 183, 186, 193, earnings, 150, 156
203, 204, 205, 206, 207, 210, 213, 218 earth, 78
demand curve, 37 East Asia, 44, 120
demographic change, 31 Eastern Europe, 125, 140, 171
Department of Agriculture, 2, 4, 11, 67, 111, eating, ix, 124
112, 126, 134, 137, 150, 151, 201 economic fundamentals, 4
Department of Commerce, 27 economic growth, 47, 76, 77, 79, 85, 86, 109,
Department of Energy, 197 113, 177, 178, 187, 195, 201, 210, 212
depreciation, 86, 126, 178, 210 Economic Research Service, 24, 61, 68, 111,
derived demand, 34 112, 126, 134, 147, 178, 201
devaluation, 32, 108 egg, 132, 185, 208, 209
developing countries, 76, 77, 78, 79, 85, 86, Egypt, 45, 103, 107, 183, 205
109, 133, 147, 178, 210 elasticity, 35, 36, 40
developing nations, 49 electricity, 77, 107
deviation, 19, 163 embargo, 166
diesel, 88, 114, 175, 179, 211 emerging economies, ix, 124
diesel fuel, 179, 211 employees, 11, 169
diet, 78, 120, 216 employment, 121, 155
Index 173
encephalopathy, 208 exports, ix, 4, 26, 27, 28, 30, 39, 42, 43, 45,
energy, ix, 34, 38, 43, 68, 74, 77, 78, 85, 97, 47, 49, 50, 74, 91, 99, 101, 102, 103, 123,
108, 110, 113, 114, 115, 116, 117, 118, 125, 126, 139, 140, 141, 144, 162, 166,
119, 121, 123, 124, 128, 129, 133, 134, 178, 179, 181, 182, 187, 203, 204, 205,
150, 151, 152, 156, 158, 169, 170, 174, 208, 210, 211, 212
177, 180, 195, 201, 211, 214, 215 external shocks, 40
energy markets, 119
Energy Policy Act, 98
Energy Policy Act of 2005, 98 F
enrollment, 131
fabric, 47
entitlement programs, 130
failure, 4, 40
environment, 63, 99, 110, 170
family, 150, 155, 156, 158, 201
environmental movement, 115
family budget, 156
environmental sustainability, 115
family income, 150, 158
enzymes, 169
FAO, 94, 211
equilibrium, 4, 6, 10, 37
Farm Service Agency (FSA), 28
equilibrium price, 4
farmers, 20, 24, 51, 74, 97, 107, 110, 114,
equity, 163
118, 119, 144, 170, 173, 174, 180, 202
estimating, 94
farmland, 50
Estonia, 81
farms, 24
ethanol, ix, 8, 15, 26, 43, 44, 62, 64, 88, 89,
FAS, 26, 27, 28, 62, 63, 65, 94
90, 91, 92, 93, 94, 98, 111, 114, 116, 117,
fats, 7, 49, 94, 193, 205, 214, 215
123, 125, 128, 129, 144, 169, 170, 171,
fear, 107, 141
173, 174, 175, 182, 186, 187, 188, 191,
February, 58, 60, 84, 112, 134, 135, 137, 139,

194, 195, 204, 212
142, 143, 147, 148, 185, 207
Ethiopia, 107
Fed funds rate, 163
ethnicity, 31
Federal Reserve, 152, 161, 162, 164
EU, 41, 47, 49, 52, 81, 82, 83, 88, 94, 103,
Federal Reserve Bank, 164
114, 140, 141, 191
fee, 11
Euro, 148
feeding, 15, 34, 38, 42, 44, 121, 179, 210
Europe, 38, 42, 80, 81, 99, 138, 140, 205
feedstock, 88, 94, 116, 117, 118, 138, 169,
European Union, 47, 52, 80, 88, 140, 179,
173
181, 182, 186, 203, 204, 210, 211
fees, 16, 61
evolution, 69
fertilizer, 20, 97, 107, 110, 127, 171, 180, 211
excess supply, 42
fertilizers, 171
exchange rate, 32, 63, 87, 126, 164, 165
fiber, 7, 34, 46, 51, 65, 174
exchange rates, 32, 63
fiber content, 51
exercise, 167
fibers, 47
expenditures, 36, 105, 106, 120, 129, 135,
financial crisis, 31, 40
146, 151, 153, 180, 201, 211, 216
financial loss, 60
expert, iv
financing, 26
exploitation, 153
fish, 197, 207
export credit guarantees, 48
flavor, 34
export subsidies, 102, 141
flexibility, 1, 146
exporter, 38, 40, 41, 42, 46, 49, 93, 103, 138
flow, 31, 35
174 Index
fluctuations, 12, 32, 167 goods and services, 3, 32

focusing, 88, 191 government, 1, 6, 10, 20, 23, 28, 33, 37, 40,
food aid, ix, 28, 40, 49, 63, 65, 105, 106, 124, 41, 42, 48, 85, 105, 118, 147, 158, 166, 167
133, 147 government intervention, 158
food commodities, 67, 69, 71, 72, 74, 100, government policy, 147
103, 104, 105, 108, 111 grades, 12, 54
food production, 127, 180, 211 grain, ix, 7, 8, 9, 11, 13, 23, 24, 26, 27, 29, 31,
food products, ix, 36, 124, 180, 193, 202, 213, 35, 36, 38, 39, 40, 42, 43, 44, 45, 46, 50,
217 58, 62, 64, 68, 78, 81, 83, 85, 86, 87, 88,
food programs, 216, 217 89, 91, 93, 100, 102, 108, 109, 118, 121,
food stamp, 130, 131, 132, 150, 151, 158, 159 123, 126, 139, 146, 148, 173, 178, 179,
food stamps, 130, 132, 159 187, 204, 210, 211, 212, 218
foreclosure, 150 grains, 8, 9, 16, 19, 21, 23, 28, 29, 34, 35, 36,
foreign exchange, 68, 74, 100, 108 37, 38, 39, 40, 41, 43, 46, 54, 55, 56, 67,
foreign producer, 23 69, 70, 73, 74, 76, 83, 85, 92, 93, 94, 98,
Foreign Relations Committee, 191 99, 100, 101, 102, 103, 108, 109, 125, 133,
fossil, 174 138, 139, 140, 144, 179, 194, 202, 211
freezing, 33, 170 grants, 151
freight, 9, 106, 141 graph, 71
fructose, 215 grass, 173
fruits, 126, 127, 128, 180, 184, 202, 206 gravity, 74
FSA, 62 grazing, 25
FSP, 160 greenhouse, 117
fuel, 43, 77, 88, 97, 98, 110, 117, 133, 145, greenhouse gas, 117
171, 180, 212 greenhouse gases, 117

funding, 73, 130, 133, 174, 217 groups, 146
funds, ix, 14, 97, 115, 124 growth, 31, 44, 47, 50, 51, 57, 58, 67, 72, 73,
futures, 1, 2, 3, 4, 6, 8, 11, 12, 13, 14, 15, 16, 74, 76, 77, 78, 79, 83, 84, 85, 86, 91, 92,
17, 18, 29, 43, 54, 59, 60, 97, 138, 142 93, 108, 109, 113, 114, 118, 131, 138, 144,
futures markets, 2, 4, 11, 12, 13, 14 152, 155, 158, 162, 163, 177, 178, 183,
185, 186, 187, 191, 192, 193, 194, 195,
201, 206, 207, 209, 210, 212, 213, 218
G growth rate, 73, 77, 78, 79, 83, 84, 158
guidance, 2, 18
gas, 114, 127, 152, 157, 179, 211
guidelines, 159, 216
gasoline, 98, 170, 175, 179, 211
Guinea, 107
GDP, 79, 158, 159, 162
generation, 117, 173
Germany, 118 H
global climate change, 114
global demand, 67, 68, 74, 78, 86, 93, 104, Haiti, 107
108, 109, 188, 210, 213 handling, 8, 146
global markets, 11, 39, 93, 101, 139 hardships, 72
global trade, 46 harvest, 17, 20, 21, 33, 35, 43, 57, 60, 61, 64,
Globalization, 148 99, 140, 143, 173, 179, 211
gold, 164 harvesting, 57
Index 175
health, 120 India, 38, 45, 46, 47, 52, 77, 80, 94, 102, 103,
hearing, 113, 216 116, 122, 125, 138, 170, 178, 179, 183,
hedge funds, 97 205, 210, 211
hedging, 3, 13, 14 Indiana, 43
hemisphere, 40, 41, 42 indication, 21, 25
higher-income, 130 indices, 69, 71, 191
hog, 37, 185, 194, 199, 207 indirect effect, 191
hogs, 165, 181, 202, 207 Indonesia, 50, 94, 102, 103, 107
home value, 150 industrial, 2, 6, 9, 23, 24, 25, 34, 37, 43, 44,
homeowners, 150, 154 47, 77, 90, 91, 93, 94, 169, 203
homogeneity, 5 industrial processing, 37
House, vii, viii, 149, 161 industry, 34, 45, 46, 115, 121, 170, 173, 174,
household, 47, 146 175
households, ix, 115, 116, 124, 129, 146, 154, inelastic, 3, 32, 35, 37, 38
158 inflation, 124, 126, 130, 132, 141, 145, 150,
housing, 154 152, 158, 161, 162, 163, 179, 180, 195,
HRS, 17, 39, 138, 139, 142 201, 202, 211, 214, 215
human, 69, 70 Information Age, 197
Hungary, 81 infrastructure, 10, 46, 173, 175
hydro, 175 injection, 163
hydrocarbons, 175 injury, iv
innocence, 162
insects, 22
I insecurity, 121
inspection, 26, 62
ice, 44, 45, 55, 56, 101
inspections, 26, 27
id, 91, 98, 134
institutions, 73
IEA, 117, 122
insurance, 14, 16, 28, 61, 62, 121, 154, 166
Illinois, 14, 29, 43, 59
intentions, 20, 21, 54, 57, 183, 206
IMF, 177, 189, 190, 191, 192, 193, 195
interaction, 115
implementation, 28, 159
International Energy Agency, 122
import restrictions, 10
international markets, 41, 43, 46, 50, 138, 146
importer, 51, 52
International Monetary Fund, 70, 71, 72, 148,
imports, 30, 47, 49, 74, 77, 78, 80, 81, 82, 83,
177, 189, 191
85, 86, 100, 103, 106, 146, 162, 166, 183,
international trade, 2, 7, 32, 178, 210
203, 205
Internet, 52
incentive, 73
intervention, 59, 158
incentives, 10, 74, 85, 91, 109, 179, 211
inventories, 162, 166
Incidents, 112
inversion, 17
income, ix, 28, 31, 47, 72, 76, 104, 105, 106,
investment, 14, 38, 171
107, 114, 116, 120, 124, 125, 129, 131,
investors, 97, 114
134, 141, 146, 149, 150, 151, 152, 153,
Iran, 104, 166
154, 155, 158, 159, 216, 217, 220
iron, 120
income support, 28
irrigation, 74
incomes, ix, 35, 76, 78, 124, 125, 129, 150,
Ivory Coast, 107
152, 178, 210
176 Index
180, 184, 188, 193, 194, 195, 202, 206,

J 210, 213, 215, 218
loans, 150, 154
January, 1, 21, 23, 24, 27, 54, 57, 60, 71, 142,
lobbying, 115
145, 184, 199, 207
location, 8, 10, 14, 18, 24, 29, 39, 140
Japan, 100, 178, 210
London, 53
Jatropha, 117
long distance, 9
jobs, 155, 156
long period, 3, 133, 180, 212
judgment, 111
long-term, 57, 72, 76, 109, 215
Jun, 157
losses, 41, 150
Louisiana, 166
K lower prices, 30, 42, 103, 188, 194, 213
lower-income, 131, 146
Kazakhstan, 102, 103, 141, 179, 211 low-income, 105, 106, 107, 116, 125, 129,
kernel, 48 146
kerosene, 175
Korea, 103
M
Kuwait, 166
machinery, 38
L magnetic, iv
maize, 116, 118, 189
labor, 119, 129, 150, 205 Malaysia, 50, 102, 107
labor markets, 119 malnutrition, 120
land, 3, 16, 28, 33, 43, 68, 73, 74, 94, 110, Malta, 81
144 management, 10, 85
land use, 68, 94, 110 mandates, 109
large-scale, 121 manipulation, 6, 13
Latin America, 125 manufacturer, 7
Latvia, 81 manufacturing, 7, 25, 127
law, 63 mapping, 60
lead, 4, 5, 37, 44, 114, 115, 120, 182, 193, market, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
194, 208, 213 14, 15, 16, 17, 18, 19, 21, 22, 23, 24, 25,
legislation, 48, 98, 111 26, 27, 28, 29, 30, 31, 33, 34, 35, 37, 38,
life cycle, 175 39, 40, 41, 42, 45, 46, 47, 48, 49, 50, 51,
likelihood, 27 55, 56, 60, 61, 62, 63, 67, 69, 74, 88, 93,
linear, 57 97, 99, 104, 108, 137, 138, 139, 142, 150,
linkage, 164 152, 155, 156, 158, 163, 166, 167, 174,
liquid fuels, 175 182, 185, 203, 204, 209, 216, 218
liquidity, 14, 163, 164 market prices, 6, 18, 28, 31, 42, 48, 60, 67, 69,
listening, 161 104, 137, 142, 218
Lithuania, 81 market structure, 5, 7, 40
livestock, 7, 11, 15, 18, 19, 23, 25, 29, 33, 34, marketing, 10, 12, 18, 24, 26, 27, 28, 29, 30,
39, 40, 43, 49, 58, 64, 126, 139, 140, 179, 31, 38, 41, 42, 44, 45, 46, 49, 55, 57, 58,
61, 127, 129, 137, 179, 181, 183, 187, 188,
202, 203, 205, 211, 214, 215
Index 177
markets, 2, 3, 4, 5, 6, 7, 8, 11, 12, 13, 17, 18, multiplier effect, 151

23, 29, 35, 39, 40, 41, 42, 43, 44, 45, 46,
47, 50, 52, 64, 65, 67, 91, 93, 98, 104, 107,
108, 109, 119, 121, 138, 139, 146, 154, N
205, 208, 218
nation, 19
Mauritania, 107
national, 11, 23, 29, 31, 39, 44, 57, 62, 64,
meals, 38, 43, 45, 48, 51, 131, 217
113, 139, 146, 166
meanings, 57
natural, 6, 114, 127, 179, 211
measurement, 21
natural gas, 127, 179, 211
measures, 51, 101, 103, 152, 157
Nebraska, 43, 184, 207
meat, 58, 76, 83, 84, 125, 178, 180, 189, 202,
negativity, 175
207, 208, 210, 213
network, 8, 9, 11, 27
media, 107, 112, 170, 171
New York, iii, v, 52, 185, 209
median, 150
next generation, 174
Mendel, 174
Nielsen, 60
metals, 97
Niger, 107
methyl tertiary, 91, 98
Nigeria, 46
metric, 45, 93, 141, 147, 178, 210
normal, 14, 16, 17, 21, 22, 137, 141, 144, 184,
Mexican, 126
207, 215
Mexico, 9, 80, 82, 107
North America, 38, 42, 138
Middle East, 44, 205
North Carolina, 13
milk, 157, 179, 180, 186, 193, 194, 199, 202,
Northern Hemisphere, 111
209, 211, 213
nutrient, 34
million barrels per day, 166
nutrition, 119, 121, 132, 133, 216

minimum price, 12
nutrition programs, 132, 133
Minnesota, 43
mirror, 12
Mississippi, 9, 29, 59 O
Mississippi River, 9, 59
Missouri, 43 objectivity, 19
mobility, 6, 154 observations, 19
moisture, 41, 57 OECD, 85
money, 64, 130, 163, 167 Ohio, 29, 43
Mongolia, 103 oil, 8, 27, 34, 35, 43, 48, 49, 50, 51, 52, 70,
Montana, 60 71, 74, 77, 80, 85, 86, 88, 94, 100, 102,
Moody’s, 159 114, 118, 125, 127, 129, 133, 135, 145,
Morocco, 103, 107 164, 166, 167, 169, 170, 175, 177, 183,
mortgage, 150, 154 186, 187, 188, 189, 191, 192, 194, 205,
mortgages, 154 206, 212
mothers, 120 oil production, 52
movement, 16, 19, 37 oil refining, 175
Mozambique, 107 oils, 48, 126, 190, 193, 198, 205, 214, 215
MTBE, 91, 98 oilseed, ix, 7, 8, 11, 31, 35, 48, 49, 50, 51, 52,
multilateral, 51 58, 62, 65, 68, 108, 109, 123, 148, 204, 218
multiplier, 151, 159 Oklahoma, 181, 203
178 Index
online, 61, 143 poverty, 150, 158, 160

OPEC, 100 poverty rate, 160
openness, 2, 6 poverty threshold, 158
ownership, 33 power, 130, 171
precipitation, 57, 110
predictability, 16
P pregnant, 132
premium, 13, 16, 139
Pacific, 9, 143
premiums, 12, 18, 34, 39, 54, 140
packaging, 127, 146
pressure, 36, 40, 46, 48, 72, 85, 86, 108, 109,
Pakistan, 45, 47, 107
130, 156, 166, 182, 194, 204, 215
palm oil, 50, 102, 114, 189
price changes, ix, 5, 13, 118, 124, 131, 132,
Paper, 122, 151
141, 189, 217
Paris, 53, 122
price index, 69, 71, 152, 189, 191, 192, 193,
pasture, 22, 73
195, 214
pastures, 25
price movements, 11, 25, 31, 35, 36, 142
peanuts, 9, 22, 49, 58
price signals, 41
per capita, 76, 78, 83, 84, 126
price stability, 163
per capita income, 76
primary data, 26
performance, 39, 121, 126, 140
private, 6, 11, 14, 18, 27, 29, 73, 85, 115, 166
periodic, 71
private investment, 14
permit, 50
private sector, 11, 18, 73, 85, 115
personal, 216
producers, 5, 8, 10, 16, 33, 35, 42, 47, 49, 50,
pesticides, 97
73, 110, 119, 140, 169, 179, 181, 182, 183,
pests, 2, 6, 33
184, 185, 186, 188, 193, 194, 195, 203,
petroleum, 77, 91, 97, 106, 109, 127, 166, 175
204, 205, 206, 207, 208, 209, 211, 212,
Philippines, 107
213, 215
plants, 26, 127, 174, 175
product market, 3, 32, 51, 177, 195, 201
Plato, 63
production costs, 37, 74, 97, 110, 117, 127,
play, 10, 13, 28, 31, 39, 47, 117, 139, 189,
180, 212
218
productivity, 73, 110, 121, 170, 171, 185, 207
Poland, 81
profit, 13, 127
policy initiative, 88
profitability, 28
politics, 166
program, 3, 11, 21, 23, 28, 29, 30, 33, 42, 48,
pollution, 91
62, 63, 130, 132, 151, 158, 159, 216, 217
polyester, 47
promote, 28, 129
poor, ix, 57, 114, 115, 116, 117, 119, 121,
property, iv
122, 123, 125, 140, 150, 153, 158
protection, 10, 98, 121
population, 31, 44, 76, 77, 78, 83, 84
protein, 7, 18, 34, 35, 38, 39, 43, 44, 48, 49,
population growth, 78, 83
50, 52, 53, 70, 83, 138, 140, 142, 182, 183,
pork, 83, 84, 103, 128, 194, 207, 214, 215
189, 204, 206
portfolios, 97
proxy, 157
ports, 9
PSD, 143
potatoes, 88
public, 2, 13, 18, 27
poultry, 7, 15, 19, 37, 44, 49, 51, 58, 128, 180,
purchasing power, 130
193, 197, 202, 207, 208, 213, 214
Index 179
rice, 1, 3, 9, 21, 22, 23, 35, 44, 45, 54, 55, 56,
Q 65, 69, 71, 80, 102, 103, 105, 118, 127,
164, 170, 179, 182, 188, 189, 202, 204,
quotas, 8, 10, 47
211, 212
risk, 16, 60, 146
R Risk Management Agency (RMA), 28
risks, 114
R&D, 73, 174 rolling, 170
rail, 9, 29, 59, 107 royalties, 74
range, 23, 29, 31, 43, 44, 94, 132, 137, 145 rural, 10, 170, 175
rats, 166 Russia, 38, 88, 98, 99, 100, 102, 138, 141,
reading, 161 179, 181, 203, 208, 211
real terms, 156 Russian, 163
real wage, 156 rye, 21, 22, 24, 54, 55, 57, 93
reality, 170
rebates, 102
S
recession, 155, 163
recovery, 150, 181, 203
sales, 26, 27, 29, 38, 39, 62, 138, 139, 141,
red meat, 180, 202, 207, 208
146, 162, 163, 181, 184, 203, 206, 208
reduction, 73, 85, 133, 192
salt, 161, 166
refining, 175
salt domes, 166
regular, 27
Saudi Arabia, 46
regulations, 59
scarcity, 17
relationship, 14, 57, 113, 170
school, 121, 130, 131, 217

relationships, 16, 17, 20, 69, 98, 104
school meals, 131
relative prices, 2, 6, 38, 43, 51
schooling, 121
reliability, 13, 91
seafood, 69, 189
Renewable Fuels Standard, 170
search, 8, 9
rent, 115
seasonality, 3, 20, 32
research, 10, 73, 110, 159, 174
second generation, 169, 173, 174
research and development, 73
security, 106, 113, 114, 115, 117, 121, 146,
researchers, 153
170
reserves, 50, 74, 100, 101
seed, 24, 25, 33, 90, 110, 169, 202
residues, 174
seeding, 21
resources, 51, 150, 151, 159
seeds, 74, 110, 171
responsiveness, 38, 41
Senate, viii, 113, 122, 169, 177, 191, 216
restaurant, 34
Senate Foreign Relations Committee, 191
restaurants, 130
Senegal, 107
retail, ix, 36, 37, 64, 105, 106, 124, 127, 146,
sensitivity, 42
151, 177, 179, 180, 193, 194, 201, 202,
Serbia, 103
205, 211, 213, 214, 215, 216, 217
series, 18, 155, 156, 191
returns, 10, 144, 182, 184, 185, 186, 188, 193,
services, iv, 3, 9, 12, 18, 27, 29, 32, 58, 154
194, 205, 207, 208, 209, 213
severity, 57
revenue, 51, 167, 174
shaping, 186, 201, 212
RFS, 170, 171, 174, 175
shares, 38, 94, 152, 154
180 Index
shipping, 133 Step-2 payments, 47

shocks, 40, 69 stimulus, 77, 151, 158, 159
short period, 69 stock, 28, 31, 35, 52, 74, 85, 98, 108, 137,
short run, 146 144, 163
short supply, 34, 45 stock markets, 52
shortage, 17, 142 stockpile, 167
short-term, 1, 26, 31, 35, 69, 98 stockpiling, 167
signals, 33, 41 storage, 2, 6, 8, 9, 14, 16, 35, 41, 166
silk, 47 strategic, 121
simulation, 118 Strategic Petroleum Reserve, 166
Slovakia, 81 strength, 7, 35, 36, 97, 164, 187, 212
Slovenia, 81, 82, 83 stress, 150, 151, 152
social security, 121 stressors, 158
soft drinks, 215 structural changes, 69
soil, 33, 41 structural characteristics, 3
Sorghum, 114 Sub-Saharan Africa, 119, 125, 147
South Africa, 42, 46, 52, 98, 107 subsidies, 28, 48, 102, 116, 130, 131, 141
South America, 38, 42, 138, 183, 206 subsidy, 102, 115, 131
South Korea, 44 substitutes, 6, 36, 47, 49, 129
Southeast Asia, 32, 50 sugar, 22, 23, 55, 56, 69, 114, 189
Soviet Union, 26, 80, 81, 140 sugar beet, 22, 55, 56
soybean, 27, 29, 34, 35, 49, 50, 51, 52, 60, 63, sugar cane, 22, 55, 56, 114
80, 82, 88, 94, 100, 102, 118, 125, 144, sugarcane, 88, 94
164, 177, 182, 183, 185, 186, 187, 188, summer, 57, 99, 100, 141
189, 191, 192, 193, 194, 195, 204, 205, sunflower, 24, 189
206, 208, 212, 213, 215 supplemental, 106, 133
soybeans, 1, 3, 9, 17, 21, 22, 23, 24, 26, 31, supply, 2, 3, 4, 6, 7, 8, 9, 10, 11, 14, 15, 16,
34, 41, 48, 49, 51, 52, 58, 65, 69, 71, 78, 17, 18, 19, 20, 23, 26, 30, 32, 33, 34, 35,
94, 100, 102, 103, 105, 107, 125, 129, 144, 37, 38, 39, 40, 41, 44, 49, 55, 56, 68, 69,
164, 170, 171, 182, 183, 187, 188, 189, 72, 74, 93, 98, 104, 113, 139, 145, 164,
191, 192, 194, 205, 206, 212, 217 173, 207, 218
spatial, 6, 8 supply chain, 34
Special Supplemental Nutrition Program for supply curve, 37
Women, Infants, and Children, 130 supply disruption, 49
specialty crop, 58 surplus, 7, 13, 41, 45
species, 44 sustainability, 115, 121
spectrum, 165 sweets, 198
speculation, 14 switching, 91
speech, 163 synthesis, 52
speed, 5, 35 systems, 74, 121, 126
SPR, 166, 167
stability, 163
stages, 57 T
standards, 121
targets, 117
starch, 8, 35, 43, 171
tariffs, 8, 10, 51, 103
Index 181
tax cuts, 158, 159 transportation, ix, 2, 6, 8, 9, 14, 16, 39, 59, 77,
taxes, 58, 102, 179, 211, 220 88, 124, 127, 129, 139, 146, 179, 205, 211,
technical change, 47 214
technological developments, 74 trend, 25, 42, 57, 77, 78, 84, 86, 98, 100, 101,
technology, 115, 117, 121, 173, 175 108, 109, 124, 131, 156, 158, 162, 163,
temperature, 57 178, 181, 203, 210, 214
tension, 171 trucks, 8
tenure, 162 Turkey, 99
territory, 50 turkeys, 84, 207
testimony, 149, 150, 152, 158, 160, 165
Texas, 59, 135, 166, 170, 181, 203
textile, 7, 46, 47, 169 U
textile and clothing, 47
U.S. Agency for International Development,
textile industry, 46
133
textiles, 34
U.S. Department of Agriculture (USDA), 2, 4,
Thailand, 45, 94, 103, 107
11, 111, 112, 126, 134, 137
thinking, 171
U.S. economy, 163, 217
threatening, 163
Ukraine, 42, 88, 98, 99, 102, 103, 125, 140,
threshold, 40, 158
141, 179, 181, 203, 211
time, 1, 3, 10, 14, 18, 28, 33, 35, 47, 60, 61,
uncertainty, 26
71, 85, 99, 104, 115, 118, 132, 135, 156,
underemployment, 156
166, 174, 181, 182, 188, 191, 193, 194,
unemployment, 155
195, 203, 204, 212, 213
United Nations, 179, 211
time periods, 18
United States, vii, viii, 3, 9, 10, 12, 19, 20, 23,

title, 54, 55
33, 38, 39, 41, 42, 43, 45, 46, 47, 49, 50,
total expenditures, 130
59, 65, 67, 85, 88, 93, 94, 104, 109, 113,
trade, 1, 2, 7, 8, 9, 12, 20, 23, 26, 27, 32, 33,
116, 138, 139, 140, 141, 142, 145, 147,
38, 42, 46, 47, 48, 49, 50, 51, 52, 62, 81,
149, 150, 151, 161, 177, 179, 180, 181,
82, 83, 85, 87, 100, 104, 105, 111, 114,
186, 187, 188, 191, 192, 193, 195, 203,
115, 117, 121, 126, 138, 146, 147, 164,
208, 211
178, 210
updating, 94
trade agreement, 1
USAID, 133
trade policies, 52, 104, 111, 115
USDA, 2, 4, 11, 18, 19, 22, 23, 24, 26, 27, 28,
trade policy, 121
29, 30, 31, 44, 50, 54, 56, 57, 58, 59, 61,
trade-off, 114, 117
62, 63, 64, 65, 78, 79, 80, 81, 82, 84, 86,
trading, 12, 14, 32, 59, 98, 104
87, 89, 90, 92, 94, 100, 111, 124, 131, 134,
traffic, 9
135, 137, 139, 142, 144, 145, 147, 148,
traits, 34
154, 155, 173, 174
transaction costs, 121
Uzbekistan, 107
transactions, 2, 13, 14
transfer, 2, 6, 8, 12, 64, 121
transition, 174 V
transmission, 19
transparency, 6 value-added tax, 102
transport, 8, 9, 15 values, 29, 38, 150, 152
182 Index
variability, 40, 41, 44, 110, 137, 144 43, 44, 54, 55, 56, 57, 60, 64, 69, 71, 92,
variable, 42, 51 93, 99, 101, 102, 103, 105, 107, 118, 124,
variables, 22 125, 127, 129, 133, 137, 138, 139, 140,
variation, 153 141, 142, 143, 144, 147, 170, 179, 181,
vegetable oil, 49, 50, 51, 52, 67, 69, 70, 76, 182, 183, 188, 189, 202, 203, 204, 205,
94, 101, 103, 125, 129, 133, 189, 217 206, 211, 212, 215, 217
vegetables, 126, 127, 128, 180, 184, 198, 202, wholesale, 127, 185, 209
206, 217 WIC program, 130, 132, 216, 217
vegetation, 114 WIC vouchers, 132
Venezuela, 103 winter, 21, 22, 38, 40, 42, 54, 56, 57, 99, 138,
Vietnam, 45, 102, 103, 179, 183, 205, 211 141, 142, 181, 188, 203, 212
vision, 170 women, 120
vitamins, 7 wood, 173
volatility, 14, 98, 132 wool, 47
vouchers, 132 workers, 119, 156, 157
vulnerability, 39, 139 workforce, 156
World Food Program (WFP), 133, 134
World Trade Organization, 48
W WTO, 48, 59, 65
wages, 58, 152, 157

Wall Street Journal, 148, 171 Y
water, 74, 98, 110, 174
water table, 74 yarn, 7, 47
wealth, 97 Yemen, 107

web, 8, 64, 191 yield, 19, 21, 22, 27, 34, 49, 50, 54, 55, 56,
websites, 59 57, 58, 62, 73, 78, 98, 100, 110, 171, 173,
wells, 74 174
Western Europe, 125, 140 yield loss, 98
Western Hemisphere, 205 yuan, 126
.wheat, ix, 1, 3, 7, 9, 14, 16, 17, 21, 22, 23, 24,
25, 26, 27, 31, 34, 36, 38, 39, 40, 41, 42,

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Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

THE PRICE OF FOOD

rendering legal, medical or any other professional services.

Food Science and Technology: New Research

The Price of Food

THE PRICE OF FOOD

Nova Science Publishers, Inc.

NOTICE TO THE READER

Independent verification should be sought for any data, advice or recommendations

contained in this book. In addition, no responsibility is assumed by the publisher for

This publication is designed to provide accurate and authoritative information with

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

ISBN: 978-1-61324-055-7 (eBook)

Published by Nova Science Publishers, Inc.  New York

in Food Commodity Prices 49

Chapter 7 Testimony by Steve H. Hanke, Applied

PRICE DETERMINATION IN AGRICULTURAL

This article provides a general description of price determination in

the “openness” of a country’s domestic market to international competition, and

AGRICULTURAL COMMODITY MARKET

Figure 1. Price Represents the Equilibrium of Supply and Demand.

• The number of buyers and sellers — more market participants are

generally associated with increased price competitiveness.

What’s Behind Market Price Differences

The general price level of an agricultural commodity, whether at a major

Local Supply and Demand Conditions

Key Role of Market Information

Commodity prices reflect the equilibrium between supply and demand at a

Agricultural Commodity Futures Markets

U.S. Department of Agriculture (USDA)

Private News Services

COMMODITY FUTURES MARKETS

A distinguishing feature of the U.S. and international commodity markets is the

on the volume of daily transactions. Thinly traded markets, as indicated by low

The Price Basis

Source: Commodity Trading Manual, ©Chicago Board of Trade, 1985, p. 65.

Figure 2. Basis Convergence.

Major Factors Influencing the Basis

Inter-Contract Price Spreads

The price relationships that exist between differing futures contract

may disappear or actually become negative — a situation called an inverted market.

Old-Crop/New-Crop Price Spreads

USDA MARKET INFORMATION

USDA routinely releases a series of commodity market information reports to

supply and demand conditions for a particular commodity, significant price

Crop Production Reports

Estimates, Forecasts, and Projections

patterns, and government policies into the future. Examples of projections

Yield and Production Forecasts

Market Demand Information

Demand for agricultural products originates from a broad range of sources

Food and Industrial Use

• The weekly Export Sales report published by USDA’s Foreign

area, yield, and production estimates.[37] Various commodity divisions within

U.S. Government Program Activity

In addition to crop production and marketing demand information, government

Market Price Information

Ending Stocks as a Summary of Market Conditions

domestic uses plus exports). As such, season-ending stocks of an annually produced

OVERVIEW OF COMMODITY MARKETS

Long-run commodity demand is driven, in large part, by population and

Special Considerations for Agricultural Markets

In general, agricultural commodity prices respond rapidly to actual and

Published by Nova Science Publishers, Inc. New York