RD. The idle speculation

As always in a crisis, there are winners. The food price crisis has led speculators play and wins in the commodities exchange. However, is financial speculation the major factor towards the agricultural commodities prices increases and volatility? Seriously, I have my doubts.

What it is behind the surge of food prices requires a more deep analysis and understanding, than point the finger to speculation activity. The usual claim (that it’s all about speculators) falls short to the complexity of the problem and it causes. Don’t forget the financial crisis.

It is true that too much non-commercial participation can cause distortions and erratic price changes, but only in the short term. But also it is true that to little speculation results in tow liquidity and potentially in large seasonal price swings (Gilbert, C.L. (2008)). Since for every buy is a sell, prices could not be driven up for a long period of time (The Economist, 2011). In fact, there is little empirical evidence that investors cause a more than fleeting distortions to commodity prices. The failure seems to be more complicated.

Food prices have risen between 40% and 60%, not only grains but also to sugar and other products. For example, the high prices of corn have an effect on other foods, because corn is used to feed cattle and chicken as well. According to the global food import bill (FAO 2011), 2010 registered the same picks of 2008, year of the worst food crises ever.

This situation represents a huge burden for the poorest countries to continue buying food from the global market at these high prices and with a depreciated dollar. The increase is not only in the prices; the vulnerability to poverty is threat for poor consumers. Last year, more 40 million people were move into poverty and 1 billion reach the status of malnourishedand hunger.

Data suggest that we are facing a huge global harvest failure (Krugman, 2011) which effects have being intensified by a growing world population, changes in habits, weather conditions, and low stocks and agriculture productivity.

Production is going down, meantime the challenge to feed an increasing world population is getting bigger. By 2050 the world’s population will reach about 9 billion and the demand for food will increase by between 70% and 100% (FAO 2011). This is enough to exert pressure on commodity prices. Besides, it is important to consider that demand for basic food (grains) are highly-price inelastic, it means people will not consume less even if prices are higher.

In addition, most of the decline of wheat and grain production occurs in Russia, Ukraine and Kazakhstan in were weather didn’t help too much, against all expectations. Canada also experienced weather related low yields for several crops. So, sever weather events have affected agricultural production. The Russian extreme heat, the dry weather in Brazil, and La Niña, El Niño produce droughts and floods. The unexpected changes in weather not only affect the production, but also create a cascade effect with strong market reactions and soaring prices. As a response of the harvest failure, responded with exports restrictions and close markets for exports. This created panic on importers, especially on North Africa and Middle East, regions that depends on Russia supply.

Nevertheless is well known that this protectionist measures, at least in the US, does not respond as a defensive mechanisms. Subsidies are raising the price of corn and diminishing the amount of grain for food. The real objective, hidden under the claim to protect small farmer, is to promote ethanol production in the benefit of some other “farmers” (big, very big in these case). This subsides at end encourage the inefficient use of global land, and makes pressure in the commodities prices.

Among all these causes, there is a common denominator. The main market failure relies in the lack ethics foundations (agreements and rules). Ethics not as an abstract morality, but as practical rules. Even regulation can’t correct the whole problem, could have an important role in avoiding abuses and perverse incentives. Agricultural commodities are not the same as other financial assets. What is in game is people life. Transparency and control (with positions limits for example) in transactions of agricultural commodities. Initiatives as the one leader by the World Development Movement should be listen, yet they focus just in one cause of the problem. It is necessary to understand the problem, create awareness and demand our rights, in a solidarity basis.

The Economist: “The future of food. Crisis prevention. What is causing food prices to soar and what can be done about it?” Feb 24 2001. From the print edition. http://www.economist.com/node/18229412

Krugman, Paul: “Soaring Food Prices”. Blog NY times, Feb 5, 2011. http://krugman.blogs.nytimes.com/2011/02/05/soaring-food-prices/

Krugman, Paul: Droughts, Floods and Food. The opinion pages. The New York Times. February 6, 2011. http://www.nytimes.com/2011/02/07/opinion/07krugman.html

FAO Food Price Index. http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

Gilbert, C.L. (2008): “How to understand high food prices”. Paper presented at FAO expert’s meeting on Policies for the Effective Management of Sustained Food Price Increases. Trade and Markets Division. Rome. 10-11 July 2008.

Javier Blas, What’s driving food prices? Financial Times. Nov 8, 2010. http://video.ft.com/v/679555154001/What-s-driving-food-prices-

Financial Time. Why are food prices rising? Ft.com/Global Economy. http://www.ft.com/intl/cms/s/2/f5bd920c-975b-11dc-9e08-0000779fd2ac.html?from=textlink#axzz1mf0FXt3n

Worthy, Murray: “Broken Markets”. World Development Movement. Chicago, September 2011. http://www.wdm.org.uk/sites/default/files/Broken-markets.pdf

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