If you’re wondering what factors influence the price of your weekly grocery bill, you’ll need to look a bit further than general inflation and corporate greed. Yes, those are key factors in the current painfully high food prices, but fluctuations in oil prices are also intimately correlated with the price of food staples.
To be clear, the petroleum industry isn’t setting prices for food crops, but it is, according to some industry experts, determining the minimum price for key food items. “Petroleum is the floor,” says Owen Wagner, senior grain and oilseeds analyst for RaboResearch. “That’s the best way to think of it; petroleum sets the foundation.” And then those other factors – inflation, commodities trading, greed, etc. – do the rest.
There wasn’t always a lockstep correlation between oil prices and food prices in the United States, but there has been an extremely clear trend for years now. It all started with minimum biofuel quotas imposed by the government. Since Congress passed the Renewable Fuel Standard (RFS) in 2005, the Federal government has determined each year how much biofuel must be integrated into the national fuel supply.
“[From] 2006 onward, the relationship wasn’t perfect, but it’s pretty convincing, as one commodity goes up, the other follows,” Wagner told Successful Farming, “and I think it would be naive of us to assume that corn is in the driver’s seat. I mean, it’s petroleum that really makes the world go round…. So that said, it’s really important now. You can’t follow ag commodities without keeping a keen eye on oil prices.”
This win for big ag shows just how massively successful the soy and corn lobbies in the United States have been in making their products not just food crops, but energy crops as well. “Higher crude oil prices simply meant that ethanol would become more competitive as a substitute for petroleum gasoline, and being a substitute, as the price of crude oil goes up, the demand for corn ethanol would go up and that would feed back into corn,” says Scott Irwin, chair of agricultural marketing at the University of Illinois Urbana-Champaign.
The intimate relationship between food and energy has been recognized for years now in policy and research spaces. In fact, there is an entire theoretical framework and development policy conceptual approach built around the complicated relationship between water, energy, and food. This idea is known as the water-energy-food (WEF) nexus.
The three nexus resources are inextricably interconnected and interdependent – making food and energy requires massive amounts of water; chemical fertilizers are made from a petrochemical base; chemical fertilizer runoff is one of the biggest threats toward clean water resources; making energy requires lots of diverted land and even crops otherwise used for food; and on, and on, and on. As demand for all three resources rises rapidly, the interconnections of this nexus become increasingly visible – as do its vulnerabilities.
Already, we’ve seen hydropower systems fail dramatically and disastrously in the face of drought. We’ve seen agriculture and energy enter into land wars. And we’ve seen the growth of an anaerobic dead zone the size of Delaware in the Gulf of Mexico as a result of petroleum-based chemical fertilizers washed down the Mississippi all the way from Midwestern corn country, causing toxic algae blooms that don’t allow anything else to survive.
The key to responsibly scaling food, energy, and water consumption is finding the synergies between these bosom buddies, and mitigating the trade-offs inherent to managing these essential natural resources. We’ve already seen some small steps forward in this regard. The use of agrivoltaics, in which solar panels and farms share land and benefit from each other's assets – such as crops growing in the shade of solar panels, and groundcover helping aid the cooling process of solar farms – has proliferated in some areas.
But there is a lot of work to be done to make sure that indiscriminate energy production growth doesn’t harm our food and water resources – and that high oil prices don’t put families into poverty as they struggle to feed themselves.
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By Haley Zaremba for Oilprice.com
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Ask a farmer what his 3 major costs are and he will most likely answer chemicals (fertilizers & pesticides), equipment/fuel, and debt service - mainly to pay for the first two. That's if he has inherited his land and he doesn't have to pay down his debt on his land.
Of course, the price of fuel and ag prices are tightly correlated!