Does The Cost Of Oil Affect The Price Of Food?

In Does The Price Of Gasoline Affect The CPI? we examined the relationship between the price Americans pay for a gallon of gasoline and the American Consumer Price Index (CPI). In this short essay we examine the relationship between the worldwide cost of oil and the United Nations Food and Agriculture Organization’s (FAO) Food Price Index. This index attempts to measure the international price of food for people of all nations. As shown in the chart below, there is a correlation between the annual West Texas Intermediate (WTI) price data for a barrel of oil and the FAO food price index. The correlation has been particularly noticeable (and alarming) since 2003. (Reference 1)

 

We all know that products made from oil play a key role in crop and animal farming, as well as food processing, transportation, and distribution. Less known is the impact higher food prices have on low income populations. The average percentage of family income spent on food in OECD nations is ~19%. In low income nations, this percentage is (on average) closer to 58%. For poor families, any significant change in the price of food can bring about an equally significant change in malnutrition and famine. Data compiled for the UN FAO would appear to indicate that in 2012 over 940 million people will not have enough food to eat. Almost 98 percent of these people live in developing nations, and 65 percent of them live in just seven countries: India, China, the Democratic Republic of Congo, Bangladesh, Indonesia, Pakistan and Ethiopia.

The cost of oil is not, of course, the only factor that drives the price of food. For example, in an attempt to reduce food price inflation, Russia (among other nations) stopped exporting grains in 2010, sending world grain prices higher. This ban was lifted in July, 2011. Although grain prices temporarily declined, increased world demand has put upward price pressure on available supply. Grain harvests (and animal fodder) continue to be affected by weather, water shortages, the loss of arable land, international conflict, national political decisions, and bad management.

I think the key point of this discussion is that there continues to be a precarious balance of world food supplies versus demand, and the cost of oil only serves to exacerbate food inflation.

TCE

For more information and comment about food price inflation, please see the following essays on The Cultural Economist:

http://tceconomist.blogspot.com/2011/10/about-water-and-food.html

http://tceconomist.blogspot.com/2011/06/how-does-price-of-oil-change-rate-of.html

http://tceconomist.blogspot.com/2011/05/inflation-parade-of-zombies.html