food-importing countries, and recent policies by some exporting countries to mitigate their own food-price inflation.

**The methodology used in this paper is ad hoc as it does not use structural models to calculate the driving factors.** Instead, the paper tries to identify a few key factors that have contributed to the increase in food commodities prices and identify other indirect impacts that were the result of scarcity in agricultural markets that was caused by the key drivers. This is an ad hoc approach, but it has the advantage that indirect, difficult-toquantify, and short-term impacts can be explored in detail. The analysis focuses on the increase in individual food crop prices such as maize, wheat, rice oilseeds, and on the index of food commodities prices since 2002. These prices reflect export prices of food commodities, not retail prices or import prices of developing countries, which would be influenced more by freight rates, exchange rates and domestic inflation. The analysis is not forward looking and does not consider how supply would respond to high commodity prices and moderate price increases over time.

# **IV. Estimates of factors contributing to the rise in food commodities prices**

There are a number of factors that have contributed to the rise in food prices. Among these are the increase in energy prices and the related increases in prices of fertilizer and chemicals, which are either produced from energy or are heavy users of energy in their production process. This has increased the cost of production, which ultimately gets reflected in higher food prices. Higher energy prices have also increased the cost of transportation, and increased the incentive to produce biofuels and encouraged policy support for biofuels production. The increase in biofuels production has not only increased demand for food commodities, but also led to large land use changes which reduced supplies of wheat and crops that compete with food commodities used for biofuels. Drought in Australia in 2006 and 2007 and poor crops in Europe in 2007 added to the grain and oilseed price increases, and rapid import demand increases for oilseeds by China to feed its growing livestock and poultry industry contributed to oilseed price increases. Other factors, including the decline of the dollar, and the increased investment in commodities by institutional investors to hedge against inflation and diversify portfolios may have also contributed to the price increases. The remainder of this section will examine these factors.

**High energy prices have contributed about 15-20 percent to higher U.S. food commodities production and transport costs.** Production costs per acre for U.S. corn<sup>10</sup> , soybeans and wheat increased 32.3, 25.6 and 31.4 percent, respectively, from 2002 to 2007, according to the USDA’s cost-of-production surveys (USDA 2008b) and forecasts (Table 1). However, yield increases during this period reduced the per bushel cost increases to 17.0, 24.1 and 6.7 percent, respectively. The contribution of the energyintensive components of production costs—fertilizer, chemicals, fuel, lubricants and electricity—were 13.4 percent for corn, 6.7 percent for soybeans and 9.4 percent for wheat per bushel. The production-weighted average increase in the cost of production due to these energy-intensive inputs for these crops was 11.5 percent between 2002 and

> 10 Corn and maize are used interchangeably in this paper.

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