Do Oil Price Increases Cause Higher Food Prices?

70 Pages Posted: 16 Oct 2013

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2013

Abstract

U.S. 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 U.S. biofuel policies in 2006. In contrast, increases in the real prices of corn, soybeans, wheat and rice received by U.S. 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 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. Rather increases in food commodity prices not associated with changes in global real activity appear to reflect a wide range of idiosyncratic shocks ranging from changes in biofuel policies to poor harvests. Increases in agricultural commodity prices in turn contribute little to U.S. retail food price increases, because of the small cost share of agricultural products in food prices. There is no evidence that oil price shocks have caused more than a negligible increase in 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 are responsible for higher retail food prices. Finally, there is no evidence that oil-market specific events or for that matter U.S. biofuel policies help explain the evolution of the real price of rice, which is perhaps the single most important food commodity for many developing countries.

Keywords: agriculture, biofuel, consumer prices, corn, crop prices, ethanol, food crisis, food price volatility, globalization, inflation, pass-through

JEL Classification: E31, Q11, Q42, Q43

Suggested Citation

Baumeister, Christiane and Kilian, Lutz, Do Oil Price Increases Cause Higher Food Prices? (October 2013). CEPR Discussion Paper No. DP9689. Available at SSRN: https://ssrn.com/abstract=2341052

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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