Oil prices, weak dollar caused food price rally: study

CHICAGO Wed Jul 23, 2008 10:26am EDT

A worker sets out fruit for sale at the Westmoreland Berry Farm stand at the Arlington Farmers' Market in Arlington, Virginia, June 28, 2008. REUTERS/Jonathan Ernst

A worker sets out fruit for sale at the Westmoreland Berry Farm stand at the Arlington Farmers' Market in Arlington, Virginia, June 28, 2008.

Credit: Reuters/Jonathan Ernst

CHICAGO (Reuters) - Rising oil prices and weakness in the dollar have combined to push food prices sharply higher this year, according to a study by agricultural economists released on Wednesday.

"High commodity prices will persist as long as high oil prices remain and as long as the dollar stays weak," said Wally Tyner, one of three Purdue University agricultural economists who wrote the study. "Lower oil and a stronger dollar would bring pressure on commodity prices to fall."

Corn futures peaked at a record $8.26 per bushel in late June, more than double their level in mid-2007. Prices have come down during the past month as favorable growing weather in the U.S. Midwest bolstered expectations for a good crop in the fall.

Soaring oil prices accounted for $3 of the rally in corn prices, according to the study, which was commissioned by the Farm Foundation. Input costs for corn production such as fertilizer, propane and diesel have risen because petroleum is a key component of those products.

An additional $1 of the corn price increase can be attributed to an ethanol subsidy that boosted biofuel production and spurred demand for more corn in the United States, the study said.

Some critics have blamed increased biofuel production for the rising food prices and worldwide food shortages.

Weakness in the U.S. dollar also has contributed to the rising food costs. Oil and agricultural commodity prices are quoted in dollars, which makes these goods cheaper for foreign buyers, increasing demand in countries other than the United States.

"The link between the U.S. dollar exchange rate and commodity prices is stronger and more important than many other studies imply," Phil Abbott, another Purdue agricultural economist, said in a statement. "Whatever impacts the dollar will influence food prices."

The study also found that price speculation has not contributed to the increased costs. Several U.S. lawmakers have recently proposed legislation to crack down on hedge funds, pension funds and other speculative investors that are blamed for the rising commodity costs.

(Reporting by Mark Weinraub, editing by Matthew Lewis)