How world food prices are changi ng and what, if any the connec

SAMMY KHAYATIAN

Economics and GlobalizationBath Spa University2843051200 Words

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HOW WORLD FOOD PRICES ARE CHANGING AND WHAT, IF ANY THE CONNECTION IS WITH THE CHANGE IN WORLDOIL PRICES?

Abstract

My goals for this essay are to establish how world foodprices have been changing during past periods and ask thequestion if the change –if any- comes in relation withthe change of oil prices. Investigating the change for every world food in themarket place would be highly unrealistic goal; hence Ihave narrowed it down to 1 main world food commodity inwheat. I shall be investigating the degree of significance withwheat and it’s positioning within the market for worldfood. Hence, this will lead me to gain an understandinginto a possible change in wheat prices and if it wasinfluenced by a change in world oil prices in pastperiods. To reach my goal throughout my essay, I will be lookingto investigate the other factors impacting on the priceof my commodity. The ways in which I will be looking todo so will orientate around the explanation of the demandand supply model. Going more in depth, by looking at howelastic or inelastic the demand or supply factors can be,and explaining this through price elasticity ofdemand/supply (PED/PES) model. Through relevant use ofdiagrams accompanied by explanations I will be looking toanalyse the possible cause and effect relationship to thechanges in wheat prices. This will allow me to give anevaluation centralising back to the question directly on“how” prices for food are changing and if there is anyinterlinking relationship with the change in oil prices.

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Table of Contents

Abstract.....................................................2Slide 1- Introduction To My Essay............................4Slide 2 – World Food Prices and the Significance.............5Slide 3 – Are food prices actually changing?.................6

How do we measure food prices?...................................6What is “The basket of goods” to measure the prices?.....................6What evidence shows food prices have changed in past periods?...........................................................6

Slide 4 – Investigating the factors provoking the advance....7Slide 5 – In depth analysis of wheat.........................8Is wheat significant?......................................8Are wheat prices changing?.................................8

Slide 6 - Demand and Supply..................................9Definitions...............................................10The Law of Demand.........................................10The Law of Supply.........................................10

Demand and Supply Model - Relation To Wheat.................11What factors caused the spike in wheat prices?Error! Bookmarknot defined.

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D e f i n e w o r l d f o o d p r i c e s○ W h a t a r e w o r l d f o o d p r i c e s a n d t h e s c o p e o f s i g n i f i c a n c e i t h a s o n a g l o b a l p o p u l a t i o n○ I n v e s t i g a t i n g t h e r o l e o f w h e a t i n t h e w o r l d f o o d m a r k e t p l a c e

E v i d e n c e f o r f o o d p r i c e s a c t u a l l y c h a n g i n g ? ○ W h a t a r e t h e c e n t r a l f a c t o r s p r o v o k i n g t h i s a d v a n c e ?○ M o r e i n - d e p t h i n t o W h e a t p r i c e s - T h e u s e o f s t a t i s t i c a l d a t a t o b a c k u p f i n d i n g s ( T h e u s e o f g r a p h s a n d c h a r t s )

D e m a n d a n d S u p p l y m o d e l ( D + S )○ D e f i n i n g t h e c o n c e p t o f d e m a n d a n d s u p p l y○ I n v e s t i g a t i n g f a c t o r s t h a t m a y h a v e l e d t o a f l u c t u a t i o n i n W h e a t p r i c e s v i a . t h e m o d e l

D o e s t h e c h a n g e - i f a n y - c o m e i n r e l a t i o n t o a c h a n g e i n w o r l d o i l p r i c e s ?○ B r i e f d e f i n i t i o n o f w o r l d o i l p r i c e s – g r a p h s a n d s t a t i s t i c a l d a t a o v e r p a s t p e r i o d s ○ T a l k t h r o u g h a n y p o t e n t i a l l i n k s w i t h p r i c e f l u c t u a t i o n s i n w o r l d o i l p r i c e s i n r e l a t i o n t o w o r l d f o o d p r i c e s ( D + S )

P E D / P E S M o d e l○ D e f i n e p r i c e e l a s t i c i t y o f d e m a n d / s u p p l y – I s W h e a t a r e l a t i v e l y e l a s t i c o r i n e l a s t i c p r o d u c t – S u b / C o m p l i m e n t s ?○ E v a u l a t e a l l t h e f a c t o r s i d e n t i f i e d t o c o n c l u d e d i r e c t l y t o t h e q u e s t i o n o n " h o w " w o r l d f o o d p r i c e s h a v e c h a n g e d a n d i f t h e r e i s a n u n d e r l y i n g r e l a t i o n s h i p w i t h o i l p r i c e s

Slide 1- Introduction To My Essay

Below I have represented how I intend to layout my essay and how the structure of the slides will be set out in accordance to overall investigation of my project.

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Figure 1; to show why food prices are so significant in todays world

D e f i n e w o r l d f o o d p r i c e s○ W h a t a r e w o r l d f o o d p r i c e s a n d t h e s c o p e o f s i g n i f i c a n c e i t h a s o n a g l o b a l p o p u l a t i o n○ I n v e s t i g a t i n g t h e r o l e o f w h e a t i n t h e w o r l d f o o d m a r k e t p l a c e

E v i d e n c e f o r f o o d p r i c e s a c t u a l l y c h a n g i n g ? ○ W h a t a r e t h e c e n t r a l f a c t o r s p r o v o k i n g t h i s a d v a n c e ?○ M o r e i n - d e p t h i n t o W h e a t p r i c e s - T h e u s e o f s t a t i s t i c a l d a t a t o b a c k u p f i n d i n g s ( T h e u s e o f g r a p h s a n d c h a r t s )

D e m a n d a n d S u p p l y m o d e l ( D + S )○ D e f i n i n g t h e c o n c e p t o f d e m a n d a n d s u p p l y○ I n v e s t i g a t i n g f a c t o r s t h a t m a y h a v e l e d t o a f l u c t u a t i o n i n W h e a t p r i c e s v i a . t h e m o d e l

D o e s t h e c h a n g e - i f a n y - c o m e i n r e l a t i o n t o a c h a n g e i n w o r l d o i l p r i c e s ?○ B r i e f d e f i n i t i o n o f w o r l d o i l p r i c e s – g r a p h s a n d s t a t i s t i c a l d a t a o v e r p a s t p e r i o d s ○ T a l k t h r o u g h a n y p o t e n t i a l l i n k s w i t h p r i c e f l u c t u a t i o n s i n w o r l d o i l p r i c e s i n r e l a t i o n t o w o r l d f o o d p r i c e s ( D + S )

P E D / P E S M o d e l○ D e f i n e p r i c e e l a s t i c i t y o f d e m a n d / s u p p l y – I s W h e a t a r e l a t i v e l y e l a s t i c o r i n e l a s t i c p r o d u c t – S u b / C o m p l i m e n t s ?○ E v a u l a t e a l l t h e f a c t o r s i d e n t i f i e d t o c o n c l u d e d i r e c t l y t o t h e q u e s t i o n o n " h o w " w o r l d f o o d p r i c e s h a v e c h a n g e d a n d i f t h e r e i s a n u n d e r l y i n g r e l a t i o n s h i p w i t h o i l p r i c e s

Slide 2 – World Food Prices and the Significance

Defining food prices; Firstly I believe it is important to define what the term ‘price’ means to fully understandwhat we are referring to when in discussion around the focal point of the essay in “food prices”. It is the amount of money expected, required, or given in payment in relation to food: (Oxforddictionaries.com, 2014).

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Why are food

prices so

signficant?

Flucations on food prices can impact world

governments significantly in terms of their balance if payments. I.e. may

import increased food commodities

Food is such an important

commodity for human survival and finding

equality amonst indivduals to

make it avaliable on a mass scale is

essential requirment worldwide

Determines the market price for

Individuals across all

countries at which they can buy and sell food products

Slide 3 – Are food prices actually changing?

How do we measure food prices?

The main measure we refer to when looking at global food prices is the food price index. This a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices (Fao.org, 2014).

What is “The basket of goods” to measure the prices?

Consists of the average 5 food commodities in meat, sugar, vegetable oils, cereals and dairy. In total there are 73 total price quotations considered by FAO specialists as representing the international are included in the overall index (Fao.org, 2014).

What evidence shows food prices have changed in past periods?

According to F.A.O (Food and Agricultural Organization) evidence does suggest the basket of goods that we measureas an index has increased. Below shows 2 pieces of data

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(tabular and graphical), which shows the overall trend ofworld food prices from the index, as a general trend has increased year on year.

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Slide 4 – Investigating the factors provoking the advance

There are several factors driving the sharp increase inglobal food prices:

o Increased demand for food generally. While productionaround the world has been increasing, consumption forfood, feedstock, biofuels and other commercial useshas been growing at an even faster rate. (Crs.org,2014)

o In terms of demand side causes, it has been suggestedthat global population growth may be a cause of thelong-term rise in food prices. According to theInternational Food Policy Research Institute, overpast years global food production has been increasingat around 1 to 2% per year, while population has beenincreasing at approximately 4%. (Tracey, 2011)

o Climate Shocks - Drought in major producing areas.Drought is affecting Australia, the Balkans and theformer Soviet Union. Other factors such as mold areaffecting grain production in South Asia. Morefloods, droughts, natural disasters globally in 2008whereas the last two years were relatively disaster-free. (Crs.org, 2014)

However it is important to keep in mind these are general factors impactingthe index of all the price index of world food prices. To explore all thesefactors for the entire sub categories of the 5 weighted good in the basketwould be very unrepresentative and hence unrealistic. As a result, I havechosen 1 commodity –in wheat- to explore.

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Slide 5 – In depth analysis of wheat

Is wheat significant?

Wheat falls under the sub-section of cereal grains from the 5basket of goods and it can be argued to be an essentialcommodity to produce and controlling its market price. Below

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Wheat provides approximately 20% of the protein for more than half of the world’s population (Namamillers.org, 2014)

Today, wheat is grown on more land area than any other commercial crop and continues to be the most important food grain source for humans. Its production leads all crops, including rice, maize and potatoes. (Fao.org, 2014)

It is the best of the cereal foods and provides more nourishment for humans than any other food source. The commodity itself is transformed into other food resources including bread and flour.(Fao.org, 2014)

Figure 4; Showing wheat as a world price from 2007 - 2011

shows the uses of the wheat as commodity from a globalperspective.

Are wheat prices changing?

Wheat as a world price hasevidently changed from 4-5years ago as the graphs showsthere has been fluxuationsacross the time period shown.However the overall trend ofdata shows that US cents perbushel for wheat has doubledfrom the start to the end ofthe time period. This evidently shows that the worldprice for wheat has changed due to severalfactors, which I will be looking more in depthat an explaining through some economic model.

Slide 6 - What factors caused the spike in wheat prices?

In accordance to a recent report by the USDA (USDepartment of Agriculture) they had identified a fewfactors that would have impacted both the demand andsupply of wheat across a broad scale.

o Low interest rates o Weather shockso Rising incomes

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Source: Tutor2U

Analyzing the main “spike” factors

Slide 7 – The demand and supply model

Before I start to look at the factors impacting thechange of world wheat prices I believe it is important tolook at the D+S to fully understand how wheat interlinksvia the model

Definitions

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Low interest rates

make grain storage

relatively inexpensive,

which increases the incentive to hold inventories, thereby raising

prices. (Hgca.com, 2014)

Rising incomes For wheat, rising incomes relate to

greater wheat consumption, as food demand is responsive to

income growth. (Hgca.com, 2014)

Weather shocks A big reason is to be found in one of

the world's largest wheat

exporters, Russia. Hit by fires and drought which have wiped out a third of the grain crop, the authorities there have banned exports, first temporarily and now until next year's harvest (2010). As a result, wheat prices spiked: they have nearly doubled since the low point in June

of $4.26. (The Economist,

2010)

Demand is the quantity of a good or service thatconsumers are willing and able to buy at a given price ina given time period. (Riley, 2014)Supply is defined as the quantity of a product that aproducer is willing and able to supply onto the market ata given price in a given time period. (Riley, 2014)

Demand & Supply Model simply shows us how prices and quantities are determined in a market.

The Law of Demand

The law of demand states in that given ceteris paribus(i.e. all other factors remaining the same) the higherthe price of a particular good orservice the less individuals willdemand it given a specific timeframe.

On my diagram -as the arrowindicates- the price increases fromP1 to P2, generally we will seethat Q.D. will decrease from Q2 tonew Q1. Which ultimately shows the market price how muchindividuals are willing to pay for a good or service atthat particular price.

The Law of Supply

The law of supply states how much agiven amount of quantities would besold at a certain price, generallythe higher the price, the higher

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Figure 6; Supply and demand changes of arise in disposable income

Figure 5; Supply and demand – Interest rates

quantity supplied. As my diagram shows as we travel upthe supply curve as price increases from P to P1 then wesee a rise in quantity supplied from Q to Q1.

Slide 7 - Demand and Supply Model - Relation To Wheat

How does this relate to supply and demand?

As I mentioned before the main factors I identified canhave impacts on both the demand and supply side of theworld price for wheat. For example interest rates (Therate at which we borrow money) would impact the supplycurve. This is the same situation with weather shocksimpacting the production of wheat in various countries. The rising incomes would impact the demand side due tothe fact that generally individual’s disposable income atthe end of each month rises. Hence, this will impactaggregate demand (AD – total demand in the economy) froma component that makes up A.D. in consumption in wheatbeing an essential crop.

S1

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Price

Q.DQ2 Q1 Q1 Q2

P2

P1

D1

S2Price

Q.S.

P2P1 D

The diagram I have drawn above showhow low interest rates would impactthe quantity supplied of wheat. Asit was cheaper to hold stock ofwheat there was no real need todistribute stock across to

S

The increase in disposable incomewould mean that generally a largerproportion of people across theworld would demand the commoditywheat. Hence, by being more able to afford

Slide 8 – Link with oil prices?

If we take a look at the priceof crude oil on graph below itshows that since 2002 (withthe exception of 2008-2009period) the trend of the datashows a rise year on year.

However if we take a look atthe price of crude oilrepresentative of 2014,although the general trend overa 14-year period has increased,in 2014 it has dropped byaround 40 USD, which is asignificant price drop for sucha important commodity.

Does the price change in oil come with an impact on wheatprices?

The increase in oil prices does an impact on crop prices.

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The diagram I have drawn above showhow low interest rates would impactthe quantity supplied of wheat. Asit was cheaper to hold stock ofwheat there was no real need todistribute stock across to

The increase in disposable incomewould mean that generally a largerproportion of people across theworld would demand the commoditywheat. Hence, by being more able to afford

Figure 7; Crude oil prices (USD) May 2011 – Mar 2014

Source: InfoMine

Figure 8; Crude oil prices (USD) Dec 2013 – Nov 2014

The supply side factors would be due to an increase incrude oil prices increases the crop production cost forbusinesses relation to higher fertilizer, chemicals andtransportation costs. (Gogoi, 2014)

On the demand side, rising fuel prices has become anissue and governments are working to increase plantationof energy crops (e.g. maize) by providing subsidies, andthe farmers are complying with these procedures bydiverting agricultural land to producing energy crops.This as a result is not only leading to reduce foodproductions but also affecting food prices. (Gogoi, 2014)

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