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CAUSES OF THE CRISIS 25


firms this link. Using data from 35 internationally traded primary commodi- ties for 1960–2005, Baffes (2007) finds that the pass-through of crude oil price changes to the overall non-energy commodity index is 0.16, whereas the fertilizer index had the highest pass-through (0.33), followed by agriculture (0.17) and metals (0.11).


What explains this strong link? Oil can affect food prices through various channels, including both the supply and demand sides. Here we focus on two: supply-side costs of agricultural production and biofuels (which are discussed separately below).6


On the supply side, oil and oil-related costs constitute a substantial com- ponent of the production of most commodities, so rising oil prices provide a strong explanation of commodity-price escalation across a wide range of food and nonfood commodities. Moreover, unlike noncommodity sectors, agriculture is more reliant on fuel-related inputs than on other types of energy. Figure 2.10 compares International Energy Agency (IEA) data, which disaggregate energy usage by economic sector and by energy source. Total energy usage at the national level is then compared with total output mea- sured in current U.S. dollars. Figure 2.10a shows that, relative to its output, agriculture does not use a large amount of energy in production. Clearly these calculations depend on the prices of different types of energy, however. For that reason Figure 2.10b shows the proportion of all energy usage in a sector that is accounted for by oil-related energy.


Agriculture is second only to transport in the oil intensity of its energy usage, suggesting marginal costs in agricultural production could be quite sensitive to oil prices, although cross-country evidence listed in Appendix Table A.1 suggests that substantial variations exist across countries. U.S. agri- cultural production in particular, though, is almost solely dependent on oil for its energy use. And to rising fuel costs we also need to add the enormous surge in fertilizer prices, most of which are made from energy products, such as natural gas. Indeed, energy costs can constitute up to 90 percent of the costs of fertilizer production (for example, nitrogen fertilizers), which helps explain why fertilizer prices rose by double the amount of cereal prices from 2005 to 2008. Moreover, the bulky nature of grains means that agricultural prices are strongly influenced by transport costs.


But just how substantial are energy costs in food production and trade? Mitchell (2008) provides the best appraisal of the effect of energy costs on


6 One might add some kind of general inflationary effect, but our focus is on changes in food prices relative to other prices. Rising oil prices also positively affected the economic growth of energy-exporting economies, many of which are major importers of food staples. This effect is discussed separately below.


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