If you’ve driven by a gas station recently, you’ve probably noticed that gas prices are tumbling. What you may realize is that the prices of some food commodities—corn in particular—are falling at about the same pace. Take a look at the image below, which I’ve borrowed from tradingcharts.com, a veritable treasure trove of commodity price data.
Clearly, price movements in the two commodities have been quite comparable, particularly over the last two years. But experts are of different minds about why they’ve followed such similar trajectories.
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One school of thought holds that the remarkable correlation between corn and oil prices is mostly a coincidence; they point out (correctly) that correlation is not always evidence of causation. The US Department of Agriculture in particular denies that there’s any significant link between the corn ethanol industry and the apparent link between corn and oil prices. Instead, they say that a combination of factors unique to each industry, coupled with a generalized speculation bubble that affected the global commodity market, led to a simultaneous (and coincidental) boom and bust in both commodities.
But another school of thought holds that the corn-ethanol industry is the single most important reason that corn and oil prices now seem to rise and fall in tandem. On this view, the fact that corn is now a substitute for oil means (almost by definition) that an increase in oil prices will cause an increase in corn prices. There’s plenty of extra ethanol refining capacity out there now, so when oil prices rise, ethanol distillers bid up the price of corn.
This op-ed in yesterday’s Seattle Times mentions both perspectives. I tend to buy the latter point of view; there’s a clear, plausible mechanism that links corn and oil prices, and the price trends seem too close to be coincidence alone.
But to settle the debate, I suppose we’ll have to wait to see if corn and oil prices continue to walk hand in hand in the coming years.
Michael Pollan often makes the point in his books (The Omnivore’s Dilemma, etc.) that agriculture in the U.S. largely consists of converting fossil fuels into commodity crops (corn, soybeans, etc.) via petroleum-based fertilizers and energy-intensive food production and transportation. Given that, it’s not surprising that corn and oil prices rise and fall together.
Matt the Engineer
What [Glaxaco] said. I think the ethanol issue is probably driving the recent curve, but our corn market would look surprisingly different without oil.
The amount of corn in the US that is converted to ethanol for fuel is quite small. The bulk of corn production goes into processed foods(eg corn syrup), stock feed (both domestic and international) and alcohol production (for human consumption). Yes the price will change slightly as a result of market demand but the key drivers for the price changes are the cost inputs. The biggest variable cost input is oil either as a transport fuel or as a fertiliser. Oil prices also affect all the inputs right down the supply chain. A geat resource to learn more about this issue is http://www.journeytoforever.org