Impact of Low Oil Prices on Food and Other Commodities

CEIC WorldTrend Data Talk - June 11, 2015 Historically, there has been a strong positive correlation between oil and food prices, especially in recent years as food production is becoming more and more fuel-dependent. The CEIC World Trend Database provides extensive coverage on commodity prices and their historic developments, as well as up-to-date forecasts until 2020. There are several channels through which the movements of oil prices affect the food industry. First and foremost, oil is used to fuel farming equipment and the transport vehicles necessary for processing the raw materials and delivering the final output to consumers. Oil is also a component of many agricultural chemicals used widely in the farming industry. Another spillover effect of oil price fluctuations on the food industry is the knock-on effect in terms of demand for biofuels (ethanol and biodiesel). These substitutes for oil are produced from various crops such as sugarcane, wheat, barley, corn and animal fats, among others. Hence, an oil price decline translates into lower demand for biofuels, which negatively affects the demand and prices for their input - the food commodities. In mid-2014 oil prices started plummeting due to several factors such as increased production of shale gas in the U.S. where fracking has taken off, the slowdown of the global economy (principally the weakening of China’s breathtaking pace of growth) and the firm position of OPEC members, particularly Saudi Arabia, not to decrease supply in response to the slump in prices. Only in February 2015 did average monthly prices start to rebound by 15.8% compared to the previous month. In April, oil prices further increased by 8.7% on a monthly basis to reach USD 57.4/barrel. However, on an annual basis the average price in April 2015 was still 45.3% lower, so prices are nowhere near their last year’s peak. Several commodity prices have followed the same pattern. Primary non-fuel commodities, which include food, beverages, agricultural raw materials and metals, were heavily affected by the drop in oil prices, decreasing from July 2014. However the fall in prices, unlike oil, has continued for nine consecutive months, with the exception of a slight increase of less than 0.1% in November 2014. Food commodities, such as cereals, vegetable oils, meat, seafood, sugar, bananas, and oranges, which represent the main components of the aggregate food commodity price index, are the main driver of the fall in the non-fuel commodity price level. What is important is that food prices seem to experience much higher volatility compared to other commodity sectors, and have experienced the largest drop since July 2014. In April 2015 food prices recorded an annual drop of 22.8% compared to the falls of 10.5% in the beverages industry, 11.2% for agricultural raw materials and 21.1% for metals. By contrast, it is worth noting that the prices of metal commodities were substantially below their 2010 level even before the slump in oil prices, so the relationship between the two is not that strong. Looking at the prices of individual food products reveals the same picture as outlined by the aggregate food commodity price index. Among others, the main food products, such as corn, wheat, soybeans etc., also experienced sharp drops in prices. The largest fall was recorded for U.S. pork, followed by U.S. soybeans and soybean meal, Brazilian cocoa beans, Norwegian fish and U.S. wheat, all decreasing on average by 36% on an annual basis in April 2015. However, not all commodities experienced such rapid declines in prices. On the contrary, many continued their steady increases and were not affected by the slump in oil prices. The top five food products that increased on an annual basis in April 2015 were peanut oil, olive oil, U.S. poultry, Latin American bananas and Australian beef, as shipped from U.S. ports. Among others, the auction price of tea in London has also largely increased in the past year. The direct relationship between oil and food prices is more evident in turbulent economic times, as experienced recently. The food industry has therefore tried for a long time to limit the impact of oil price volatility which hampers the stable development of the sector. Several steps made in that direction include the usage of more renewable energy sources, introducing more efficient modes of transport and developing more innovative fertility systems. By Petar Chavdarov - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
11th June 2015 Impact of Low Oil Prices on Food and Other Commodities