PEANUTS & OIL PRICES Economics and Globalization MARCH 1, 2021 BUSINESS AND MANAGEMENT YR.1 Nina Ritzel G. Quintos Table of Contents 1. Introduction ............................................................................................................................ 2 1.1 Background of Peanuts .................................................................................................... 2 2. Link between Peanuts prices and Oil prices .......................................................................... 3 3. Prices of Peanuts .................................................................................................................... 4 4. Oil prices ................................................................................................................................ 5 5. Comparison of Peanuts and Oil ............................................................................................. 6 6. Demand and Supply ............................................................................................................... 7 7. Price Elasticity ....................................................................................................................... 8 8. Complimentary and Substitutes ............................................................................................. 9 9. Conclusion ........................................................................................................................... 11 10. References .......................................................................................................................... 12 1. Introduction Food commodities typically refer to necessary ingredients to produce various goods, mainly in the raw form of edible materials, which helps to become a complete dish (Amadeo, 2020). Food commodities can be either natural agricultural commodities or processed commodities, provided that they are sold or distributed for human consumption. In this research, the relation of Peanuts prices as a food commodity and oil prices are elaborated and discussed along with the factors that impacted it. 1.1 Background of Peanuts Peanuts are said to originate in the tropical and temperate regions of South America. Peanuts are the 13th-largest important food crop and the 4th-largest source of edible oil (Settaluri, Kandala, Puppala and Sundaram, 2012). Although they are small, peanuts play a significant nutritional role as they have incredible health benefits. As a component for multiple dishes and particularly sought for its oil, China consumed 17.3 million metric tonnes of peanuts in 2016 (Arya, Salve and Chauhan, 2015). In the United States, peanuts were recognized as a southern regional food until after the Civil War, when technological advances lead to a rise in the demand for roasted and salted peanuts, peanut oil, peanut butter, and as a source for biodiesel. Peanut oil Refined peanut oil is the preferable oil in several restaurants because it does not absorb food aromas and flavours and has a high smoke point. Unrefined peanut oil is a well-known choice for dressing salads, roasting vegetables, since its flavourful oil is highly desired. Biodiesel Peanuts have a great oil content (45-52%) compared to other oilseed crops. The potential peanuts will generate 120-150 gallons of Biodiesel per acre with a yield of 3,000 pounds per acre, 70 grade (70% of the peanut's weight in the shell) and 50% of oil content. 2. Link between Peanuts prices and Oil prices In the production process of harvesting the crops, agricultural commodities like Peanuts depend heavily on machinery that used in the shelling of peanuts and oil pressing (Wang, 2016). When oil prices of machinery increase, the Peanuts price will also increase due to the escalation of production costs. Uses (Zafeiriou et al., 2018): Demand for Biodiesel To fuel farm machinery Transport other inputs to the farm Transporting farm output to the consumers or to the market As the prices for oil rise, the demand for biodiesel rises. Biodiesel is a type of biofuel produced from vegetable oil and animal fats used as a substitute for petroleum diesel to be more environmentally friendly since it is pure and causes far less damage when released on the environment or when spilled (Gebremariam and Marchetti, 2018). It can also improve fuel lubricity to keep the machinery from wearing off since it also has a cleaning effect on diesel engines. Since peanuts are a great source of biodiesel it will play a big part on the manufacturing process because it fuels machineries needed to process the peanuts and the products made from it and can also contribute for fuelling machineries that is used for its transport. In the United States, the prime oil used for making biodiesel fuel is soy oil. However, Peanut oil produces 120-150 biodiesel per acre compared to the 50 gallons of biodiesel per acre of soy oil production (Wright, 2018). With the large gap of peanut and soy oil production, peanuts demand as a substitute oil used for biofuels will rise, so will the supply for peanuts. 3. Prices of Peanuts Figure.1 The prices of peanuts shown on the table in Figure.1 shows dramatic shifts and increases from year 2011 to February 2021. The span between 2011 and 2012 exhibits an immense climb on its prices that started on November 2011 with 14.0% annual change at the price of $2,472.44 per metric ton, while on December 2011- April 2012 the prices was maintained to $2,528.43 per metric ton. The basis of the sudden increase in prices was because of the strong demand of the population and the poor quality peanuts that was harvested in 2010 on United States, which resulted to shortage of supplies of high quality peanuts that caused the sudden climb of the prices and its products such as peanut butter and peanut oil (Riley, 2011). It is also known that a big supplier of crude oil Libya has faced a political turmoil that lessened their production of oil which affected the number of machineries used to harvest peanuts. Environmental factors has also contributed to the increase of prices because the second largest peanut supplier Texas and Georgia has experienced extreme drought all season in many areas (Zalben, 2011). This severe drought affected the growing seasons since multiple peanuts has been contaminated which reduced the quality of most harvested peanuts in 2010-2011 which has been labelled as “The Great Peanut Shortage of 2011”. Although, despite the constant increasing prices on 2011-2012 the prices for peanuts has started to show decline with -31.88 % annual change on February 2013 with only $1,635.00 per metric ton. Driven by a shortage of peanuts in 2011, high peanut prices caused farmers to plant tons of peanut in 2012, almost a record amount of acres (Smith and Dowdy, 2013). The increase in production was expected yet the yields was above everybody’s expectations that is why on 2013 they responded by decreasing the prices of peanuts and shifting its acreage to more soybeans, cotton, and corn. 4. Oil prices Figure. 2 The crude oil prices shown on the graph on Figure 2 shows the drastic increase and decreases from the year 2011 to February 2021. It can be clearly seen that the prices from 2011-2012 has the highest point of increases with 10.97% annual change at the price of $108.65 per barrel. However, its price eventually decreased by -6.88% on August 2011 and continued until October with the price of only $99.85 per barrel but also increased on 2012 $117.79 selling price per barrel. Sudden increase of prices on 2011-2013 was because of a Political turmoil in Bahrain, Egypt, Libya, and Yemen, which caused the prices to stay near $100 throughout (Davies, 2011). The protests made on Libya has greatly affected the supply of Libyan oil since its light sweet grade barrels are mostly demanded by refiners despite Saudi Arabia assuring to increase their production for sour grade type of oil (Naimi, 2012). This substitute has increased the demand for their crude oil since the buyers in China and Europe of Middle East barrels sought that this alternative for crude is suitable. Despite the return of Libyan sweet oil and the sudden increase of their production the prices were still the same since the sour grade market became tight and was said that supply and demand for heavy sour crude and light sweet crude is likely to be narrow in the coming years (Beales, 2011). Although, on mid-2014 to early 2016 the prices for oil has declined drastically which can also be seen on Figure 2 with -22.39% annual change on January 2015 at the price of $47.11 per barrel. The production for Shale oil played part on the decline of oil prices since more alternatives has been discovered with the help of technological advancements from $100 to only $60- $35 dollars throughout (Kilian, 2015). 5. Comparison of Peanuts and Oil Figure. 3 It can be seen that both oil and peanuts are somehow connected whether prices increase or decrease on the figure shown above, its price ranges are somewhat not far from each other. Since both commodities has increased their prices on 2011 due to the political turmoil faced by some part of crude oil industry while peanuts faced drought and lack of machineries affected by the lack of oil supply for fuel which caused their prices to increase (Stevens and Hulbert, 2012). With the production of peanuts for biodiesels, its supply will be affected by both its shortage and surplus. Both prices for peanuts and oil are indirectly associated and have a slight contribution on each other. However, with thorough examination it is clear that effects of supply and demand shows that peanuts and oil does not always follow trends in unison to each other. 6. Demand and Supply The two fundamental concepts in modern economics are demand and supply. Demand is what people want and supply is the total amount of goods available for the consumers (Fernando, 2020). This concept is dependent on each other wherein the increase on the demand of goods the supply will also increase and vice versa. Figure. 4 What affects Demand?(Petingger, 2019). Preferences and Trends- Consumers preferences have a major influence on the demand of peanuts and oil especially when it becomes a trend on the market. When a certain commodity becomes a trend and preferred by many the demand for it will surely increase but the demand for commodities will decrease if it is not a trend and not preferred my most consumers. Price- The prices plays a big role on the demand since the higher the price for a commodity the demand will decrease since complementary goods is dependent and will likely increase prices and vice versa. Income- The income of individuals also affects the demand since a decrease on their income will also reduce the demand for commodities. What affects Supply? (Agarwal, 2019). Natural Conditions- Other weather conditions has affected the Supply of peanuts since the experienced drought and contamination has decreased the better goods to supply in the market. Storage surplus and shortage- The surplus and shortage of the available commodities will affect its selling price since too much will cause the decrease of it supply and less supply will increase the prices of commodities. Political Factors- Multiple instances has affected the supply of goods such as The political turmoil that happened in Libya that disabled them to supply sweet grade oil to the market. 7. Price Elasticity Price elasticity is a measure of how reactive the industry is to a shift in prices for a commodity. Price elasticity of demand (PED) illustrates the price-quantity relationship demanded and presents a detailed calculation of the influence of price changes on demanded quantity (Gallo, 2015). Figure. 5 When we say Inelastic whether the prices of a commodity increases or decreases the demand is not affected greatly, while elastic means that a small increase or decrease on the price of a commodity will immediately affect its demand (Hall, 2020). On this case, both peanuts and oil are inelastic, despite them having multiple alternatives. Since peanuts has many uses which are highly demanded by most people such as peanut butter, this compliments a lot thing such as bread, biscuits, and jams which are highly demanded while for peanut oil it can be used for both biodiesel and cooking that is why an increase or decrease of it prices will not affect its demand. Many people mistake prices as the main key for the increase and decrease of demands however, it is just considered as a factor since most commodities are still sought for its quality, taste, and brand (Meyers, 2018). Oil prices are also considered as inelastic since despite its fluctuations its demand still stays the same. Since oil are constantly used for fuelling machineries and cars for transportation in which a lot of people are using. The changes in its prices will not affect its demand since it is needed for such transportation to work. Despite them having multiple substitutes it can still be seen that they are inelastic since they are always in demand on the market and usually consumed by most of the population. 8. Complimentary and Substitutes Complimentary goods are products consumed simultaneously while Substitute goods are products is the consummation of another product in place of the other (Jan, 2019). Commodity Peanuts- Oil- Complimentary Peanut Butter(Bread) Peanut Flour Peanut Oil (Biodiesel) Machineries Petrol Jet Fuel Substitutes Soy Butter Pecan Flour Soy Oil Biodiesel Solar Power Gasoline There are Multiple complimentary for peanuts and oil however, when it comes to its substitutes peanuts has more than oil since it’s uses are common and a lot of alternatives can be used since Peanut Flour and Peanut oil can be easily substituted. Like Pecan Flour instead of Peanut flour since both have a nutty flavour, extends shelf lives, and used for gluten-free baked goods (Hyland, 2018). Figure. 6 While for peanut oil, soybean oil can be an alternative since it is cheaper and easy to work with when converting it into biofuel but Peanut oil produces more gallons (Tech, 2021). It can be seen from Figure 6 that on early 2011 the prices of peanuts increased and on 2013 its prices fell since refiners for biodiesels has found converting peanuts into biodiesel can be expensive. These factors may affect its demand but not much because compared to other substitutes peanut oil has many uses since it is sought for its unique nutty flavour and compliments multiple goods especially in United States. People has also researched for inexpensive ways to use peanuts as a source of biodiesel these days wherein we cans see that both the price of soybean oil and peanut oil are not far from each other (Silveira Junior et al., 2016). On the other hand, oil does not have many substitutes since its demand is stable. Since many people have become environmentally aware, many have looked upon substitutes for oil that is more sustainable like the use of solar power. Biodiesels have also been in demand since it easier to source and has the same use from the usual oil used in running machineries. The demand for machineries like cars and trucks would affect the supply and demand of oils. 9. Conclusion Through this research, the researcher was able to identify the relation of food commodities like peanuts to oil prices. It can be seen that peanuts has contributed to oil and has influenced its prices indirectly as a source of biodiesel while oil has contributed as a source of fuel for the machineries used for the harvesting and processing peanuts which will directly affect its price. Their supply and demand are both inelastic since it is mostly consumed and needed by most of the people and lots of places are allotted such as farms. The prices of both food commodities and oil is changing differently since food commodities are increasing while the prices for oil is decreasing due to other sources of oil such as the production of shale. 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