Last month, Reuters reported oil prices have fallen to almost the lowest in six years. In turn, what’s also been at their deliciously lowest in four years? Food prices.
The oil industry and current global food system appear to be linked, particularly by price, due to food production being so dependent on fuel and transportation. Therefore, lower oil prices put deflationary pressure on food prices and vice versa, and, according to OilPrice.com, “The prices of both food and fuel have risen and fallen more or less in tandem in recent years.”
Leo Abruzzese, the Economist Intelligence Unit’s (EIU) global forecasting director, said in a statement, "The 60 percent decline in the price of crude oil since July also is good news for food security. During the last 25 years, food and energy prices have tracked each other closely, so cheaper crude oil usually means more affordable food."
Food prices across the globe fell 2.8% between September and November 2014, according to the new Global Food Security Index. The EIU reported that falling oil prices, along with record harvests, contributed to a drop in food prices to the lowest they’ve been in four years.
The UN’s Food and Agriculture Organization (FAO) reported decreased prices in all commodities except cereals. Rabobank, an agriculturally focused global financial services company, predicts that the price declines of agri commodities will make a significant contribution to total food costs and that this will ultimately have an effect on lower costs for food production, which will lead to lower retail food prices.
How farmers stand to benefit
AgWeb reports that in Arkansas, the average farmer spent about 16% of his total 2014 operating budget on diesel fuel and other energy sources. This equates to about $61,000 per 1,000 acres.
Since December 2014, retail diesel fuel prices went from $3.61 to $2.93 per gallon, which provides an array of benefits to farmers.
From planting, feeding, and harvesting to processing, packaging, and distribution, oil in the form of fuel finds its way into just about everything. Oil is even an important component for the construction, repair, and delivery of everything from farm machinery, boxes, and processing facilities to infrastructure like storage, ships, trucks, and roads.
With oil prices dropping the way they are, farmers’ operating costs may also drop significantly.
The trickle-down effect
Drops in food prices may not happen immediately, as a trickle-down effect has to occur for commodities to decrease in price on the consumer level. Savings from cheaper oil may move down the supply chain, from farmers to processors, then to retailers, and finally, as competition among retailers pushes prices increasingly downward, to consumers.
According to Annemarie Kuhns, a USDA agricultural economist, transportation prices, driven down by lower oil costs, affect food prices but do so with a lagging effect that could be as long as one to 10 months. She said in an NJ.com article that consumers would see decreased food prices for produce faster than for more processed items, such as bread, and also that transportation costs are a "contributing factor but not the largest factor."
"Food retailers are reluctant to move the prices significantly up or down unless they see that this is going to be sustainable," Alfons Weersink, a University of Guelph professor in the department of food, agricultural and resource economics, told the Cambridge Times.
Could lower food prices translate to higher food consumption?
Moody’s predicted that consumers will “spend their extra cash on discretionary food items.” But according to predictions from Rabobank, consumers will enjoy the lower food prices, but not enough to strongly affect consumption, namely due to “the relatively low price and income elasticity of food and beverages.”
Rabobank predicts "the biggest volume increase" to come from upmarket food and beverage consumption, which includes foodservices, wine and spirits, beef and pork, exotic fruits, and fruit juices. This will be particularly true in developing regions, as food makes up about 50-70% of the average household income of the world’s poorest 2 billion people. That’s compared to less than 10% for a typical American household income. According to EIU data, close to 75% of the countries it surveyed benefited from the drop in oil prices (and record harvests), which has helped make food more affordable for consumers worldwide, reports Reuters.
On the other end of the spectrum, some rural areas do not participate in the global food trade and thus aren't plugged into oil prices for maintaining their crops, reports Reuters. Also, the food price drops may actually hurt subsistence farmers as importers may not be willing to pay as much for the farmers' crops.
While the current state of lower oil prices and the resulting lower food prices can be beneficial for consumers, the opposite can hold true as well. If and when oil prices increase, if not soar, food prices could go up right along with them.
