Tag: IFPRI

Oh, so you CAN say it out loud

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.

Posted on by Ed 0

Global food prices again . . . but maybe a solution!

New Scientist has an interview with the authors of a recent report that blames food price shifts on financial market manipulation and speculation.  Worth reading – they are quite clear in their argument.

Is this another crisis like the one we had in 2008?

Not quite. Maximo Torero of the International Food Policy Research Institute (IFPRI) in Washington DC notes that oil, the real driver of food prices and of the 2008 crisis, is relatively cheap, at around $75 a barrel, not over $100 as it was in 2008.

In 2008, both immediate grain prices, and the prices offered for future grain purchases in commodities markets, climbed steadily for months, whereas now they are spiking and dipping more unpredictably, which economists call volatility.

“The market fundamentals – supply and demand – do not warrant the price increases we have seen,” says Torero. Not all harvests have been bad, and after 2008 countries rebuilt grain stocks. “There are enough stocks in the US alone to cover the expected losses in Russia.”

The food riots in Mozambique were not due to world grain prices, he says, but because Mozambique devalued its currency, making imported food more expensive.

So what has been happening this year?

Markets are responding nervously to incomplete information. First there was a series of shocks: Russia’s export ban, lower maize forecasts, then, days later, a US ruling to allow more bioethanol in fuel which seemed likely to further reduce the maize – the main source of bioethanol – available for food. Meanwhile there was no reliable information about grain stocks, which is strategic information that most countries keep secret.

The result was nervous bidding and sporadically surging prices in commodity markets. And that attracted the real problem: investors wielding gargantuan sums of speculative capital and hoping to make a killing. When speculation exacerbated the price crisis of 2008, Joachim von Braun of the University of Bonn, Germany, then head of IFPRI, predicted that it would continue causing problems. “We saw that one coming and it came,” he says. “Food markets have new design flaws, with their inter-linkages to financial markets.”

Volatility also makes it harder to solve the long-term, underlying problem –inadequate food production – by making farmers and banks reluctant to invest in improved agricultural technology as they are unsure of what returns they will get. “Investment in more production alone will not solve the problem,” says von Braun. As long as extreme speculation causes constant price bubbles and crashes, either farmers will not get good enough returns to continue investing in production, or consumers will not be able to afford the food.

“Without action to curb excessive speculation, we will see further increases in these volatilities,” he says.

h/t to Resilience Science

This is very interesting, but what I found intriguing about this article was the researchers’ suggestion for how to address this uncertainty – transparency and information about supplies via remote sensing:

All the major producers already use remote sensing technology to watch each other’s fields. If countries would reveal just once what stocks they hold, says Torero, the satellite images can be used to calculate whether those stocks have risen or fallen, as growing conditions change. “All we need to know is the baseline,” he says. Reliable information about stocks could offset unwarranted jitters about crop failures, such as the ones that are contributing to the current market volatility.

Von Braun goes farther: he says there should be a global technical organisation that keeps track of world grain stocks and production, and which decides, using complex computerised models of world food markets, what range of grain prices are actually warranted by real supply and demand. Then if speculation starts to drive prices up out of this band, countries could intervene on markets, buying and selling just enough to counter speculative pressure. “This doesn’t stop speculation, just extreme speculation,” he says.

He thinks it would take a fund of $20-$30 billion to do the trick. In September the World Bank extended a $2 billion fund to respond to food price crises, but that is aimed at helping the poorest survive price spikes rather than intervening to stop them happening.

You may or not like the idea of a global organization or fund, but the idea of actually monitoring the supplies of the commodities to examine if pricing reflects actual market dynamics (supply/demand controlled for expected future conditions) is fantastic and already possible.  The only people who would lose here are those whose only skill set is in exploiting the uncertainty and lack of information in the market for their own profit – especially those willing to exacerbate uncertainty and opacity to generate larger profits.

Posted on by Ed 1

Hang on, here we go!

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.

Posted on by Ed 5