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Purdue University Weighs In on What’s Driving Food Prices

July 25, 2008
The Farm Foundation recently released a report prepared by Purdue University agricultural economists on the forces driving food price increases. They conclude that higher food prices are the result of the complex interaction of global changes in supply and demand for commodities, the depreciation of the U.S. dollar, as well as growth in production of biofuels.

According to the authors, these factors have combined to rapidly raise demand for U.S. grains beyond current production, leading to “the change from a surplus to a shortage era” and to increased prices. The authors also say that 75 percent of the demand for biofuels has come as the result of increased oil prices rather than the renewable fuel standard.

This is much the same conclusion drawn by researchers at Texas A&M University (see earlier post). It is also similar to the stated view of Bruce Babcock of Iowa state University’s Center for Agricultural and Rural Development during testimony to the Senate Committee on Homeland Security:
“Elimination of the [RFS] mandate would reduce expected ethanol production by about 4 percent … and the price of corn would fall by slightly more than 1 percent.”

The Purdue University researchers also highlight “the potentially large supply response that could result as farmers in developing countries increase production and productivity.”