As many Americans adjust budgets to keep food on the table, a recent World Bank study says oil prices are the biggest driver behind food prices – and represent a reason to keep an eye on government policy.

Post-2004 across-the-board commodity price spikes, which seemed to resemble previous temporary trends, are now becoming more permanent, study authors John Baffes and Allen Dennis say. But that more permanent trend also coincides with price spikes in other areas, including energy, fertilizers and precious metals, leading study authors to develop an economic model which determines the correlation between commodities and other outlying drivers.

The model studied the food commodities maize, wheat, rice, soybeans and palm oil. In short, it compared commodity prices to energy prices, exchange rates, interest rates, inflation, income and a stocks-to-use ratio to determine which driver had the most impact on food prices.

Authors found that crude oil prices stood out among all of the drivers studied. Baffes says the magnitude of the post-2004 oil price jump is a key factor. Between 1997 and 2004 and 2005 to 2012, stocks of wheat declined by 17%, while oil prices increased by 220%.

"This explains why oil prices were responsible for almost two-thirds of the change in food prices," Baffes says.

Stocks-to-use was the second factor, though when studied in pre-2004 time periods, it was the largest driver behind food price movements.


 

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