Entries tagged with “commodities”.


The AP is running a story on food prices – and it is heavily focused on the problem of commodities speculation.  Actually, it is heavily focused on French President Nicholas Sarkozy’s comments on the causes of the food price increases.  While Sarkozy acknowledged the importance of issues like climate change, he quickly moved past these causes:

Sarkozy said the difficulties go far beyond the whims of nature. He said financial market specialists — instead of agricultural trading houses — had taken over the global farm market and called for change.

“Take the Chicago market,” said Sarkozy, listing how the derivatives exchange totals 46 times the annual U.S. wheat production and 24 times that of corn. He said 85 percent of the contracts on commodities futures markets are held by purely financial players “with no link to the commodity itself.”

“The example shows to what extent our world has lost a sense of value, a sense of reality, a sense of capitalism to serve the development and happiness of people,” Sarkozy said.

It is worth noting that Sarkozy is no leftist . . . though he will likely be painted as one for that last sentence.  Then again, anyone who notes that markets might have negative as well as positive effects will be painted as  anti-capitalist/naive/out-of-place ideologue (see the comments on Dot Earth’s mention of my concerns over climate change communication).

Let me note that Sarkozy is not demonizing all speculation – nor do I.  As I discussed in an earlier post, speculation plays an important economic role that can distribute the stresses that lead to future price spikes over time, thus ameliorating future crisis.  However, this is not to say that speculation should just run unregulated – basic regulation that keeps speculation within productive parameters would likely enhance its value in the food security arena.  (See this IFPRI forum for more on the role of speculation in world food markets)

However, more information for these markets would probably help as well.  While the USDA and other organizations offer estimates of global and sometimes national-level agricultural production, it would be good to have concrete, sub-national datasets on ag production updated in real time – this would remove some of the uncertainty in commodities markets that can then be leveraged into arbitragable price instability . . . and that alone might start to clean out the more problematic players in agricultural commodities markets.

Updated 7 June 2011: I can find no evidence that any of my TIAA-CREF funds are holding Glencore.  So far, so good . . .

aaannnnddd

No Glencore in my Vanguard 2025 Fund (kid’s college fund).  Sadly, though, there is Gazprom.  And probably a hell of a lot of other problematic stuff . . . nobody is clean, I tell you.

 

 

As a geographer, I spend a lot of time thinking about interconnections – how events and processes in one place influence events and processes in other places.  I use these interconnections as a teaching tool in my courses, to help students understand how, for example, our levels of consumption here in the US preclude similar levels of consumption for the rest of the world (not enough resource out there to make that happen).  I am always careful to make sure that the students understand that I am as bound up in these linkages as they are – I certainly do not live off the grid, walking/riding a bike everywhere and eating only food I grow (or that is grown locally).  But it still hurts every time a find a new way in which I am bound to, and therefore a cause of, some of the processes I find most frustrating in the world.  So, this excellent post on FairPensions was a bit tough.  Simply put, Glencore, a well-known problem company that trades heavily in the food commodities markets (and appears to be making those markets, as it were, to its own advantage) has been fast-tracked into the FTSE 100, and therefore is now likely part of a lot of the mutual funds and pension plans to which we all make contributions.  I’m going to have to check on this, and pray that TIAA-CREF has some sense, but . . . dammit.

For an earlier discussions of food insecurity and the commodities markets, see here, here and here.

The rising price of food has been a subject of many news stories over the past few months, with the intensity of attention ratcheting up recently upon news that the FAO’s food price index has just surpassed its 2008 peak.  Stories about this issue – well, at least the good stories – point out the highly variable way in which this increase in the price of food has played out in different places.  One good example of this sort of reportage is from Saturday’s Washington Post.

This variability, however, tends to be illustrated instead of interrogated, with explanations remaining remarkably shallow (see my earlier complaints about how explanations related to “local specificity” and “cultural difference” tend to obscure important processes and blame the victims of larger processes).  However, a quick examination of the information we have about food prices and their impacts points to the fact that global food prices are not all that useful for understanding the variable food outcomes we see in the Global South.  First, we have to understand that the increase everyone is talking about is in an index of food prices – that is, the price data drawn from a number of different foods.  Though the index is going up, this does not mean that the prices of all foods are rising equally.  As the WaPo and others have noted (and is quite clear in the FAO presentation of the data), when you disaggregate the crops and their prices, the biggest increases globally are in sugar, cooking oils and some fats (there are, of course, local surges in price for particular crops, but those are often independent of the larger global markets).  While cereal prices are increasing, they are not rising as quickly as these other foods, and they remain below 2008 levels.  So who is hit by these prices has a lot to do with who consumes sugar, or products heavily constituted by sugar and oils.  Oils are widely distributed in diets, but sugar is not – the poorest tend to have the least access outside the Global North (ironically, this is reversed in the Global North, as noted by Fast Food Nation and Morgan Spurlock’s Super Size Me).  Meanwhile, staple crop prices are not rising anywhere near as rapidly.  So the principal drivers of the rising price index are not a huge portion of the diets of those in Global South . . . with one key exception: urban populations.  More on that in a second.

Second, who is hit by these prices has to do with the degree to which producers and consumers are linked to global markets.  Many rural producers are consumers of their own produce, or the produce of their neighbors.  As a result, they are somewhat insulated from shifts in commodity prices.  I’ve seen this at work in Ghana firsthand – it is a disaster for incomes in these areas, but not for food security.  Instead, people just eat the crops they might otherwise have sold at market.  Of course, this comes with other costs, such as in terms of the purchases of needed household goods, and sometimes in terms of children’s education (in places where school fees are still charged).  But in terms of food security, not so much.  FEWS-NET has offered this same interpretation of the impact of rising food prices on the countries in which it operates, arguing that this increase in this index is not as worrying as what we saw in 2008.  This is one of those instances where integration with global markets, long seen as a goal of development programs and a clear pathway to prosperity, can also produce significant new challenges for the global poor . . . or at least that segment of the rural poor whose livelihoods and production are highly integrated with global markets.

So, where people are dependent on global commodities that are internationally sourced for their food or incomes, shifting global food prices are more likely to result in direct shocks to their food security.  While there are certainly rural populations that fit this description, once again it is the urban poor who are most generally and directly exposed to this challenge.  With little food production of their own, they are dependent on purchased food that has passed through one or more middlemen from the source of production.  By definition, their food supply is more commodified, and more connected to global markets, than most of their rural counterparts.

Therefore, there isn’t a whole lot of point to looking at global price indexes to understand the relationship between these prices and food insecurity.  Instead, we have to look at who is affected by these prices, and how – the connections are complex and often involve tracing what appear to be unrelated factors as they radiate out from these price changes.  This is the only way to appropriately design interventions to address these issues . . .

Don’t tell us that the food price index is rising – tell us why it is rising . . . then we can do something about it.

Nobody is reporting this very heavily, but the drought and subsequent really enormous fires in Russia are having an impact way beyond Russia’s borders.  Specifically, a lot of arable land, used to raise wheat, suffered through a serious drought, and then burned, taking with it a big chunk of Russia’s, and indeed the world’s, wheat production.  We are being set up for another serious spike in wheat prices, and therefore food prices, worldwide.

NPR’s reporting on this issue is very optimistic. But the problem here is that the optimism is very, very selective.  When the chief executive of the International Food & Agricultural Trade Policy Council, says “U.S. producers will be able to step up to the plate and meet global demand that’s not presently being met by Russian wheat producers,” she is correct . . . assuming that nothing else will go wrong this year that might compromise wheat production elsewhere.  In 2008, the wheat price spike was driven by the convergence of a rise in biofuels production, a drought in Australia, and some fairly shadowy financial instruments that may have generated a commodity bubble around wheat.  In other words, a lot of stuff went wrong at once.  Given the uncertainty we see in the global economy, and the rising climate variability in wheat production centers like Southern Africa, arguing that nothing else will go wrong strikes me as a really weak bet.

Yes, US farmers will profit mightily from an increased demand for their wheat – but if demand outstrips supply, which seems increasingly likely as we move into the fall, everyone from the global poor to the average US consumer is going to feel the impact of rising food prices again.  Right now, nobody is doing anything to address this likelihood, and a reactive approach to food price spikes never solves the problem in time to matter for those most affected . . . anyone want to get proactive about this, please?