Prices for corn and oil are falling in tandem.
If you've driven by a gas station recently, you've probably noticed that gas prices are tumbling. What you may realize is that the prices of some food commodities -- corn in particular -- are falling at about the same pace. Take a look at the image below, which I've borrowed from tradingcharts.com, a veritable treasure trove of commodity price data.
Clearly, price movements in the two commodities have been quite comparable, particularly over the last two years. But experts are of different minds about why they've followed such similar trajectories.
One school of thought holds that the remarkable correlation between corn and oil prices is mostly a coincidence; they point out (correctly) that correlation is not always evidence of causation. The US Department of Agriculture in particular denies that there's any significant link between the corn ethanol industry and the apparent link between corn and oil prices. Instead, they say that a combination of factors unique to each industry, coupled with a generalized speculation bubble that affected the global commodity market, led to a simultaneous (and coincidental) boom and bust in both commodities.
But another school of thought holds that the corn-ethanol industry is the single most important reason that corn and oil prices now seem to rise and fall in tandem. On this view, the fact that corn is now a substitute for oil means (almost by definition) that an increase in oil prices will cause an increase in corn prices. There's plenty of extra ethanol refining capacity out there now, so when oil prices rise, ethanol distillers bid up the price of corn.
This op-ed in yesterday's Seattle Times mentions both perspectives. I tend to buy the latter point of view; there's a clear, plausible mechanism that links corn and oil prices, and the price trends seem too close to be coincidence alone.
But to settle the debate, I suppose we'll have to wait to see if corn and oil prices continue to walk hand in hand in the coming years.
This piece originally appeared on the Sightline Institute's blog, The Daily Score.
