Prepare for more food price inflation

July 8th, 2007

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In today’s globalized world, the adage that “everything is connected to everything else” has never been truer. So, today, we will look at this interesting question: what has the oil got to do with food price inflation?

As we all know, oil prices had been rising steadily over the years. Our view is that in the long run, despite the short-term fall of oil prices (see Analysing recent falls in oil prices?real vs investment demand) oil is going to be more expensive (see Is oil going to be more expensive?). The fact that there is a major push towards biofuels (e.g. ethanol) tells us that the security of the world’s oil supplies is not something that major countries are taking for granted any longer. Indeed, the list of oil worries includes: Peak Oil, Global Warming, rise of Chinese and Indian demand for oil, Middle-East geopolitical risks, etc.

Recently, we saw this news article: Biofuels ‘to push farm prices up’:

The rapidly growing biofuel market will keep farm commodity prices high over the next decade, a key study has said.

As we said before in Can ethanol replace oil?,

With these factors in mind, although ethanol will have its limited role to play in the world?s energy problems, we are not confident of it supplanting petrol in a mass-scale in the foreseeable future.

In fact, any major concerted effort towards this will have repercussions on the price of food. Indeed, the US efforts to produce ethanol from corn have caused corn prices to rise (see Corn as food or as fuel?).