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Do oil price increases cause higher food prices?
[Biofuels, binding constraints, and agricultural commodity price volatility]

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  • Christiane Baumeister
  • Lutz Kilian

Abstract

SummaryUS retail food price increases in recent years may seem large in nominal terms, but after adjusting for inflation have been quite modest even after the change in US biofuel policies in 2006. In contrast, increases in the real prices of corn, soybeans, wheat and rice received by US farmers have been more substantial and can be linked in part to increases in the real price of oil. That link, however, appears largely driven by common macroeconomic determinants of the prices of oil and of agricultural commodities rather than the pass-through from higher oil prices. We show that there is no evidence that corn ethanol mandates have created a tight link between oil and agricultural markets. Moreover, increases in agricultural commodity prices have contributed little to US retail food price increases, because of the small cost share of agricultural products in food prices. In short, there is no evidence that oil price shocks have been associated with more than a negligible increase in US retail food prices in recent years. Nor is there evidence for the prevailing wisdom that oil-price driven increases in the cost of food processing, packaging, transportation and distribution have been responsible for higher retail food prices. Similar results hold for other industrialized countries. There is reason, however, to expect food commodity prices to be more tightly linked to retail food prices in developing countries.— Christiane Baumeister and Lutz Kilian

Suggested Citation

  • Christiane Baumeister & Lutz Kilian, 2014. "Do oil price increases cause higher food prices? [Biofuels, binding constraints, and agricultural commodity price volatility]," Economic Policy, CEPR;CES;MSH, vol. 29(80), pages 691-747.
  • Handle: RePEc:oup:ecpoli:v:29:y:2014:i:80:p:691-747.
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    File URL: http://hdl.handle.net/10.1111/1468-0327.12039
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    More about this item

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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