Splitting food prices from chaff

The silver lining: the price of a number of agricultural staples follows oil's descent and may soon bring relief to the world's poor.

Falling out: a recent tumble in the price of corn and soybean with the rising cost of seed, fuel, and land rents has many US farmers concerned.

If there is a silver lining to the global economic slowdown, it could be that plunging grain and soy prices may soon bring relief from soaring food costs to the world's poor. Earlier this week in the US, the price of wheat for December delivery tumbled to a 12-month nadir, while soy skidded to its lowest price in the past 11 months and corn fell to a 10-month low. Wheat futures in Argentina and soy prices in China also suffered in a worldwide retreat from commodities, as investors fretted over the weakening global economy.

The prices of a number of agricultural staples have broadly tracked crude oil in recent months, and with good reason. One connection between crops and energy is that nitrogen fertilisers, the most important class of chemical plant nutrients, are made from natural gas. Another is that corn is the primary feedstock for producing ethanol, a biofuel. Increasingly in the US and Europe, this is blended with petrol, both to boost the overall supply of transportation fuel and to meet legal requirements for biofuel use that were introduced in the hope of reducing carbon emissions. Similarly, soy beans can be processed to yield biodiesel.

With demand for petrol falling in the West, the price of ethanol has recently plunged in lock-step with crude. On Monday, crude and ethanol prices both slid to their lowest levels since November, with ethanol for October delivery plummeting 8.4 per cent on the Chicago Board of Trade in its biggest one-day drop in 22 months, while crude for November delivery fell 6.5 per cent on the New York Mercantile Exchange. Both commodities are nearly 40 per cent off the all-time record prices each set in July.

US corn prices have fallen even harder. With the harvest in full swing, Chicago Board of Trade corn futures are hovering near US$4 (Dh14.7) a bushel, about 45 per cent lower than the record high of $7.65 a bushel set in June, after heavy rains and flooding across the US corn belt sparked fears of ruined crops. Analysts say US grain prices may still have further to fall, as southern hemisphere farmers are gearing up for spring planting and just as the world economy seems to be growing more fragile. For traders in agricultural commodities, that adds supply concerns to ongoing worries over demand and wealth destruction engendered by the world financial crisis.

But what is bad for Iowa farmers may be good for third world countries that import US grains, and especially for the urban poor who cannot grow their own food. In July, the UN's Food and Agriculture Organisation and the Organisation for Economic Co-operation and Development warned in a joint report that the burgeoning use of cereals to make biofuels could cause structural changes in farm commodity markets that could keep prices for grains and food oils high for the next decade. Many biofuel critics have pointed out that corn used to make ethanol not only means less corn for feeding people and livestock, but also discourages farmers from planting other edible crops that could grow on the same land.

But now, the combination of plunging energy and grain prices could reverse that situation, at least temporarily. The National reported last week that the price of food in Abu Dhabi supermarkets had stabilised in the past two months, after prices surged in early summer. A longer-term worry, however, is that energy price volatility will from now on be reflected in widely fluctuating food prices, making life tougher for most people on the planet.

US ethanol producers have already experienced the downside of the biofuel boom, and several have gone out of business. On Tuesday, Gateway Ethanol, a Kansas producer, filed for bankruptcy protection after a creditor moved to foreclose on the company's plant. VeraSun Energy of South Dakota last month warned of a substantial third quarter loss, then said several parties had expressed a "strategic interest" - wording typically used to signal a corporate buyout. In August, Denver-based Biofuel Energy had 88 per cent of its market capitalisation wiped out in a share price plunge from $7.75 to 93 cents, due to a hedging miscue in which the company locked in higher-than-market corn prices while ethanol prices slumped.

The one piece of good news for US ethanol producers and corn growers alike is that the US government's $700 billion economic rescue package contains an extension of subsidies on ethanol production - a programme that John McCain, the Republican candidate in the US presidential race, had promised to abolish if elected. @Email:[e-mail]