PracticalDad: Economic Webs
Several days ago, I posted the latest PracticalDad Price Index and apart from coffee's monthly rise of 4% - for a rise of 30% in six months - what threw me was an 11% rise in Canola Oil, a vegetable oil used for cooking. With this huge rise, Canola Oil took the six month prize for an increase of more than 30%. What I've been thinking of since is how something as mundane as canola oil might have repercussions through this economic web that we've constructed and how something as distant as Libya's Gaddhafi now bombing his own oil fields affects the price of bread for Junior's packed lunch.
First though, just what is canola oil? Read the official Canola Industry literature and you find that it's derived from the seed of the canola plant, grown principally in Canada. It came into usage in the late 1970s/early 1980s and is generally considered better due to the low amounts of bad fats and high amounts of good fats per serving. It can be purchased in the various sized bottles in the baking/cooking aisle of the grocery store but is also used extensively, along with other forms of oil, in food processing. This is especially the case when the food pertains to baked goods such as breads or cake mixes. How widespread? When I searched the pantry and freezer last night, I found that canola oil was used in the loaf of white bread, the frozen loaf of potato bread, the box of baked snacks in the pantry and also the several boxes of various cake mixes. Humans aren't the only ones eating it, though. The remainder from the processing can be made into seedcake and sold to ranchers to serve as cattle feed, which means that it's also part of the foodchain in the butcher's section. Through the six months of the index, flour prices have been stable with only about a 1% rise in the period.
What didn't occur to me was the extent to which canola is also used as a biofuel source, along with palm oil and our old standby, corn. How much is it used? Well, enough to make a sizable dent in food costs as potential food is redirected to energy needs. As I recall, even George Bush commented that we still needed to keep some corn around for food.
There's actually significant statistical relationship between oil price and canola oil, such that when oil prices rise, canola and other vegetable oils rise as well. The long and short is that with oil prices rising as they are - and they are presently tracking to surpass the summer 2008 highs - the biofuel producers will likewise compete with food producers for a finite supply of food, er fuel, whatever.
According to OPEC, there really isn't much slack in their production so that the loss of oil from some place like Libya can't be easily offset. So when Colonel Gaddhafi decides to bomb his own oil fields to prevent the Libyan rebels from selling it overseas, that field production is removed from use and places a hit upon the supply line. As users bid for the finite supply, the price increases and as the price increases, people think more and more of biofuels. It's akin to watching Curly smack Moe, who in turn wheels about and smacks Larry in a slapstick routine. But the routine isn't all that funny as the food producers are in turn passing the increased cost onto us via the grocery stores. So as you try to keep the food spending down by making Junior eat sandwiches in a packed lunch, understand that the impact isn't coming from the farmers, but instead the seemingly unrelated energy issue.
In this developed economy, we have managed to create a web such that a string plucked outside Benghazi resonates on the supermarket shelf.
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