High Cereal Prices
An analysis of the causes behind the increase in the world market price of corn, rice and wheat.
The purpose of this study is to examine which factors played an important role in the food price crisis of 2007-2008. Theories used are Microeconomic theory, explaining changes in supply and demand, and Macroeconomic theory, explaining the impact of changes in exchange rate on prices. A theory regarding speculation is also used to explain the impact of speculative activities effects on price. The method used is multiple regression analysis in order to determine the effects which ethanol production, oil price and dollar exchange rate had on the surge in the price of corn, rice and wheat.The data used is in monthly observations during the period 2005-2008. However, other factors are taken into consideration during the study, such as production quantity, stock size, economic growth, speculative activity and population growth. The outcome of the study showed that the supply side encountered higher production costs due to the oil price increase which put an upward pressure on the prices. At the same time the demand side encountered increased demand of grains as an effect of heavy increased ethanol production which also put upward pressure on the prices. The depreciation of the dollar also contributed to the increased price of grains, as the majority of agricultural commodities are traded in American dollar.