Via Resilience Science:
International wheat prices are up 60-80% since July. And according to the Food and Agriculture Organization of the United Nations (FAO), this price increase is not a standard market function – despite some crop failures, “Global cereal supply and demand still appears sufficiently in balance” to have much more stable prices. So what, pray tell, is driving the increase? Well, the FAO blames “national policy responses and speculative behaviour.”
Garry at Resilience Science does a great job of covering the obvious rebuttal: “Oh, the FAO is another organization out to demonize markets – this argument isn’t based on evidence.” Um, not so fast . . . in a discussion paper for the International Food Policy Research Institute (IFPRI) – and by the way, the US is a major funder for IFPRI – Bryce Cooke and Miguel Robles appear to have demonstrated quantitatively that various proxies for speculation and activity on futures markets best explain the dramatic price rises for food in 2008. To quote:
“Overall, we conclude from our time series analysis that when taking the four commodities analyzed here there is evidence that financial activity in futures markets and/or speculation in these markets can help explain the behavior of these prices in recent years. Other explanations are only partially supported for the particular case of one agricultural commodity or not supported at all. We do not claim, however, that these other explanations should be disregarded; all that we can say is that in using the variables considered in this study and the particular time series models herein, we do not find such evidence.”
Well, looks like Frederick Kaufman (see this earlier post) was at least partially right . . . in this case, the futures markets are causing more problems than they are solving. Put another way, these studies demonstrate empirically that the manipulation of these markets is killing people – literally. This is not market failure, people. This is human moral failure. But we wouldn’t want to regulate those markets, now would we?
Sigh.
Surely the obvious rebuttal would be that speculation is *supposed* to affect prices, in order to ensure that supply and demand remain balanced in the presence of production lags? Affecting prices is precisely their function.
I found it an interesting paper, if a little inconclusive.
I found it interesting that the highest part of the price spike was roughly between Nov07 and Sep08 in each case, and look what happened to fertilizer prices between Nov07 and Sep08…
Two possible explanations – a fertilizer price spike was foreseen and led to speculation on the futures market that raised prices in anticipation, or a problem was anticipated, raising prices and hence production, and hence increasing demand for fertilizer. The increased production matching the shortfall and as a result exports remained stable. The way to test it would be to look at the volume of fertilizer used. If volume dropped or remained stable, then fertilizer prices rose for other reasons and the grain markets responded. If volume increased, then it must have been used somewhere, so why didn’t production go up? This would suggest a problem elsewhere was being mitigated, and grain supply drove fertilizer prices.
The connection doesn’t show up directly because the futures market introduces a time shift – anticipating future events – and the effects thus appear in advance of the causes – making causal attribution by statistical means tricky. The net result will be that in the event of an anticipated problem with supply, short term price changes will be driven primarily by the futures market while long term prices are driven by fundamentals, and this relationship with the futures only appears shortly in advance of the problem.
Or it could be, as you suggest, that the futures market randomly decided to bet on rising prices for no reason, causing the food price spike, and the fertiliser price spike is either unrelated or a consequence.
I note that in several places they comment on indications that their models are not fitting the data as well as expected. This may be a sign of a more complicated relationship than the simple lagged linear model that has been assumed.
I have to reply quickly, but the timing of the fertilizer spike suggests a response to spiking food markets, not a lead – the prices spiked long after the growing season in much of the world, so the spike was coming in anticipation of greater need the next year (signaled by higher food prices). But the higher prices were not a simple response to supply and demand – they were manipulated.
And I don’t think the futures market made a bet for no reason – they bet in certain, systematic ways that fundamentally altered the entire market in a manner they could loosely predict and profit from. The evidence for this continues to grow . . . not all financial instruments (or the people who use them) are bad – you are right, sometimes they are very, very productive and useful. But what we see happening in food markets is, I fear, greed at the expense of the poor.