Frederick Kaufman has a very interesting piece (subscription required) on an underreported phenomena in the 2008 spike in food prices – what he calls a “food bubble” caused by commodities investment vehicles structured around wheat futures.
While I think this article is worth reading and considering carefully, it is important to recall that Kaufman is trying to make a particular point about the pervasiveness of problematic investment vehicles in our economy, and the ways in which these vehicles seem to hurt everyone but the people who invent them. This point is well-made. However, in making this point Kaufman underplays a couple of really important points:
1) Wheat is but one of the staples that saw a price spike in 2008. And while price stress on one staple (wheat) can lead people to start shifting into another (corn), driving the prices of the second commodity up, it would take some serious research to substantiate the (implicit) idea that a price spike in wheat could have a dramatic impact on corn prices in Africa (where wheat is the 8th most important crop, at 3.2% of total agricultural production) (via FAOSTAT). Wheat is important, but maize is the crop that links the world together . . . which leads to my second point:
2) There was a convergence of factors that created the price spike in 2008. In one sentence, Kaufman acknowledges several important factors:
“By the time the normal buying season began, drought had hit Australia, floods had inundated northern Europe, and a vogue for biofuels had enticed U.S. farmers to grow less wheat and more corn.”
But this is only one sentence in the whole article. In an effort to point out the impact of investment vehicles on global food security, Kaufman’s narrative underplays just how important these other factors were in driving up the price of other staples like corn (the extra corn was largely rerouted to biofuels, and the drought in Australia removed a great deal of expected production from the world supply).
The point here: food insecurity is enormously complex, and caused by the intersection of processes and events operating at multiple scales. Even as we tease out some of these processes and events, we must also highlight how each specific process or event intersects with other causes to produce particular outcomes in particular places.
A couple of questions, observations?, about which I would love your opinion.
I found the Kaufman piece to be confusing in its lack of explanation of how commodities are shorted; exactly what does a broker or investor do to hedge commodities? I guess one would buy the equivalent of commodity puts or what ever they are called in commodities. I would also would have liked to learn how (if) all of those taking long positions did as a result of the spike.
Regarding your observation about corn. I have to look over your site for your comments on Peter Canby’s Retreat to Subsistence in the Nation, 16June.
Thanks, Don
I had not seen Canby’s piece – it is good, but not surprising. The way we produce corn in the US is completely unsustainable – Pollan does a very nice job of laying this out. In fact, I think that his discussion of this problem is the best part of Omnivore’s Dilemma. How corn is raised elsewhere is completely different.
Canby is wrong, though, to assert that corn grown elsewhere is mostly for animal feed. That is true in the US. In sub-Saharan Africa (where I do most of my work) it is mostly eaten by people, not animals. So spiking corn prices do more than drive up the price of meat – they impact a key staple of people’s diets.
I suppose we could also argue that rice links the world together. A great book on the general subject of rice and its place in US history is Judy Carney’s Black Rice . . .
Thanks for the Judy Carney, Black Rice ref. I’m almost through “The Rice Economies” by Bray. Don
Very interesting website. I am so looking forward to reading more posts.