Tag Archives: speculative investment

Rising Global Food Prices

Algerians protest cuts in government subsidies amid food price increases.

Algerians protest cuts in government subsidies amid food price increases.

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

Food Crises and Financial Speculation

Food Riots in Mozambique

Food Riots in Mozambique

There’s been much ado in the press recently about the emerging global food crisis. As global food commodity prices have increased over the past several months, governments have taken steps to address the price increasing, fueling greater response. The decision of the Russian government to limit wheat exports and the food riots in Mozambique garnered the greatest attention, leading the Financial Times last week to lead its online edition with an article entitled “Fears grow over global food supply.” 

Several of my favorite bloggers, including Chris BlattmanDuncan Green,  the Global Dashboard, and Raj Patel, have already chimed in on the topic. Perhaps the most interesting discussion was between Chris Blattman and Duncan Green, who offer competing perspectives on the two most important questions, namely: 1) Is there a food crisis today? and (2) What caused it?
 According to Blattman,

Globalization and growth should reduce price spikes in future. More countries are producing crops. Climate shocks in Argentina are not that tied to climate shocks in Russia or China, and so price volatility from supply shocks should be going down. Falling transport costs also mean that more substitutes are available, further reducing price volatility. So things should be getting better over time, not worse, especially if trade allows countries to diversify their diet. Envision a future of diminishing instability…

Are bread prices the proximate cause of the riots? Probably. Are they the root cause? Unlikely. Are global grain markets to blame? Unclear. How about bad domestic policy? Almost certainly. How about shallow and alarmist journalism about those poor, violent, unwashed nations? There are some things you can bet your life on.

Green counters, “This reminds me of the apocryphal French diplomat arguing in a Brussels punch-up ‘I can see it works in practice, but does it work in theory?’ Here’s the practice – you can clearly see food prices pretty smooth up til 2007, then going haywire.” Green offers the FAO Food Price Indices to support his position (see below).  

FAO Food Price Indices (2002-2004=100)

FAO Food Price Indices

But the real take away is that instability in global food prices is increasing. There’s also good reason to believe that speculative investment rather than real changes in demand is fueling the instability. Indeed, the dramatic price increases seen during the 2007 food crisis had very little to do with declining supply or increasing real demand.  Here, I think Blattman is fundamentally mistaken, price volatility will continue to increase not fall over time. Not a rosy picture.