OREANDA-NEWS. Guest blogger Jonathan Kingsman is the founder of Kingsman SA, which is now a unit of Platts, and he remains a Platts consultant.

The monthly Food Price Index of the UN Food and Agriculture Organisation (FAO) averaged 182.7 points in January 2015, down 1.9 per cent from its value a month earlier. The Index had already fallen nearly 10 per cent in the twelve months up to December 2014 and is now off nearly a quarter from its peak of 240.1 registered in February 2011. The Index has returned to levels last seen in August 2010. Except for a short-lived respite last October, the FAO Food Price Index has been falling every month since April 2014.

Last month’s decline was largely driven by a 7 per cent decline in wheat prices, something the FAO says is “confirmation of an ample supply situation this season and stronger likelihood of inventories reaching their highest level in over a decade.” At its current value, the FAO Cereal Price Index has fallen to its lowest since July 2010 and is now more than a third below its peak reached in June 2008.

However, the fall in food prices pales in comparison to the collapse in energy prices: spot futures prices for light crude fell 45.3% in 2014 while those for gasoline and heating oil fell 48.5% and 40%, respectively.

Energy is an important input cost for food production: not only do fertilizers have to be bought and greenhouses heated, but crops also have to be harvested, processed and transported to the shops. All this uses a lot of energy. Lower oil prices mean lower food production costs.

In addition, low oil prices may reduce the competition for food from biofuel production. Despite an increase in the ethanol mandate in Brazil, a weak currency and low world gasoline prices may encourage Brazilian producers to divert a greater percentage of their next sugarcane crop to sugar. The US may also use less of its corn for ethanol. Argentina could use less of its soybeans — and Indonesia less of its palm oil — for biodiesel.

There is a reasonable historic correlation between energy costs and food prices and some commentators predict that food prices will continue to fall in 2015.

But there are other factors involved, most notably the weather. Coffee prices were one of the few bright spots on the commodity board in 2014, increasing by more than 50% due to dry weather in Brazil. The country’s sugar producers escaped relatively unscathed from the drought: lower agricultural yields were partially offset by an increase in the sugar content of the cane. However, there is now concern that the dry weather in Brazil might also be impacting soybean production.

A stronger US dollar should also be a significant food price driver in 2015. Last year, a weaker Brazilian real partially shielded Brazilian farmers from falling global prices. Although world sugar prices expressed in US dollars fell 11.5% in 2014, the Brazilian real fell 12% against the US dollar, leaving sugar farmers’ returns largely unchanged. The same could be said for wheat, with Russian and Ukrainian exporters benefiting from a collapse in their currencies.

The strengthening dollar means that, at least for the moment, farmers in most exporting countries are not getting the price signals to reduce production. Russian sugar beet farmers, for example, are expected to respond to high prices in rubles by planting extra acreage.

But politics may have the final say. Farmers everywhere make up a large block of voters and a strong political lobby; governments have a history of interfering when food prices are low in order to maintain rural incomes, either through subsidies, reserve stocks or some system of minimum prices.

The problem is that when governments do interfere, they further distort the price signals and encourage farmers to keep producing, resulting in even lower prices. Such policies are therefore unsustainable in the long term. But since when have politicians ever worried about the long term?