There’s been a great deal of discussion about the impact of the recent spike in global food prices. From Oxfam to the UN Food and Agriculture Organization to the World Economic Forum, there’s been considerable concern expressed that global food prices are threatening political and economic stability around the world. David Bosco, blogging at Foreign Policy, suggested that the recent surge in political protests across the Arab world, from Algeria to Egypt, may be in part connected to increases in global food prices. Recent Gallup polling found that respondents across 18 Sub-Saharan African countries ranked food security and hunger as the primary concern.
The spike in food prices is a concern for governments around the world. But few clearly understand the causes, and there remains considerable debate about both what is driving the price increases and what should be done about them. In a recent column for the Financial Times, Javier Blas argued that,
The current spike in food prices has followed the chain of events of the crisis of 2007-08 in almost every aspect, a worrisome prospect. First the crop failures; second the export restrictions; and third the initial food riots followed by governments taking emergency measures to control rising food costs, including price caps and cuts to import tariffs. And now the fourth element of the 2007-08 food crisis is emerging: panic buying.
And now, Paul Krugman has chimed in on the debate. According to Krugman, the recent spike is due primarily to production shortfalls linked to erratic weather patterns, which in turn are likely connected to global climate change. While I generally find Krugman’s analyses compelling, I think here he’s too quick to dismiss the impact of speculative investment in food commodities. Speculation clearly has an important role to play in smoothing out market fluctuations. But, as Timothy Wise argues on the Triple Crisis blog,
Some $9 trillion in trades take place in commodity derivatives, with 80-90% in over the counter (OTC) trading, outside of public scrutiny. Five banks control 96% of derivatives activity, giving a few players decisive market power. The ratio of non-commercial speculators to commercial hedgers (those with a commercial interest in the traded commodity) is by some estimates 4:1, roughly a reverse of the shares ten years ago when speculators accounted for 20% of the activity. Then, such speculators indeed provided liquidity to the markets without overwhelming them. That is no longer the case.
The problem, in other words, is not the existence of speculators, but the dramatic increase in the scope of speculative investment. And given the size of the trade, there’s little governments may be able to do to curb these activities