Bad news on food prices – they're going up again

World Food Prices, 2005 to June 09According to the FAO’s excellent and user friendly (even I can make it work) website on world food prices, which has both global price trends and breakdowns by individual country/commodity, world food prices bottomed out some time in February this year, and are now on their way back up again (see graphs – composite food price figure for 2009 is the rising white line on the left hand graph). Oil and mineral prices are also back on the upward curve.

Back in March, I pointed out that the same FAO database was showing that the previous fall in world prices was not translating into a fall in consumer prices – prices had become sticky for some reason. So are consumers also insulated from the new round of price rises or are they getting the worse of both Kenyan maize pricesworlds and seeing consumer prices start to rise? A cursory trawl of the website (you could spend hours on there), suggests a mixed picture. In some eg Kenya, prices have resumed their upward path (see graph).

All this is confirmed by an email from Fred Mousseau, our food security specialist, from Ethiopia, which reads:

‘I confirm from East Africa where I’m doing some research at the moment and where several countries including Ethiopia and Kenya are still in the same situation of food crisis. While it hasn’t been in the news since last year, prices have decreased but remained high. The humanitarian appeal for Ethiopia 2009 is actually exceeding the one of last year. We are talking at the moment of 20 mn people highly food insecure in the region. Interestingly, when you ask people about the 2008 food crisis here, they don’t see it as a one off event in 2008 and consider they are still in the same situation. The current humanitarian appeal for Ethiopia is only covered at 45% at the moment while we are entering the hunger gap. I met people in the Government today who were asking Oxfam to push donors on more resources.’

Update: 4 July 2009. The Economist has a two page spread trying to explain why food prices are rising again when superficially, you would expect production to rise in response to price signals and then prices fall back. Their conclusion is that nearly all the initial supply response to the food price rise came from farmers in rich countries, not poor ones. Prices resumed their upward path because ‘slow irreversible trends’ were at work – population growth, the shift to meat consumption and that a ‘genuine mismatch of supply and demand’ remains.

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Comments

5 Responses to “Bad news on food prices – they're going up again”
  1. Matt Griffith

    Hi Duncan,

    Hope all well – just checking into the blog after a while of not reading.

    Glad to see you’re picking up on this – a big and important issue.

    Looking at your graphs what is striking is the large increase in volatility in prices during 2007 & 2008 compared to 2005/06.

    Would be interested to see volatility mapped over a longer time period – I suspect it would show large cyclical swings, but this would be over a much longer time periods – due to the usual ag production problem of overinvestment leading to overproduction (you know the cycle).

    What seems to be happening now is that volatility is much sharper and occurs in much shorter periods – and I think this is because of financial market activity (i.e. effective demand), rather than actual commodity market behaviour (although the two inter-relate a little, although it’s noticable in 2007 and 2008 that ‘bad’ supply news tended to get picked up on more than ‘good’ market news).

    The swings in prices highlighted in 2007 and 2008 are extraordinary – and can in no way be fully explained by underlying supply and demand (no matter what theories we may have about the destabilising impact of climate change or what we to think about the importance of lack of investment in developing country agriculture)

    Put crudely – I think 2007 & 2008 saw large in-flows of speculative money into these markets and these were the main reasons for the price movements seen.

    The growth of hedge funds and other investment vehicles means that this speculative pool of funds is now much larger than before, has much more powerful mechanisms to increase exposure and leverage and ICT means that these swings are picked up by players much more quickly. Hence much sharper swings in prices.

    In fact it’s now possible for me as a private individual to take speculative punts through my own high street bank trading platform (could take a leveraged ETF out on increased wheat prices this afternoon if I fancied).

    My worry is that most hedgies are now looking to take up anti inflationary positions to deal with the qualitative easing being undertaken by the central banks. And once we start to see upward momentum, this will be amplified (especially as there are precious few other performing assets out there at the moment). Bubblicious!

    What’s Oxfam been doing to look at the links between commodity funds and price volatility?

    It’s clearly important to people in dcs who have to pay for increased prices.

    Given the policy rethinking around international financial architecture, are there any proposals on the table for constraints on particular financial instruments, how hedge funds deal with commodities markets and increased transparency? You’d get some strong allies from some of the G20, G33, NIFCs etc..

    But the intellectual debate seems to been fairly silent.

    This may be because:

    * the NGO community doesn’t really do understanding of financial products (beyond crude instincts)

    * the sensibilist wing of NGOs has a background history of the difficulties of commodity markets and hence doesn’t like to cover this subject area

    * Calling asset prices as ‘wrong’ can mean long periods of looking wrong yourself – ask anyone who called the housing bubble to early

    * NGOs like to put volatility down to either ag under investment or climate change (the new campaigning paradigm) – and both mean a reason to ask for new funding streams from government or the public.

    * It’s difficult

    But there’s a big risk in the increased volatility that this produces, and a big opportunity for reform (which you rightly highlight). And intellectually these questions of market pricing and momentum behaviour are slap bang in the centre of some academic study here – let’s make sure this doesn’t just looking at housing.

    But it is an issue that’s going to need some very solid research work and getting some finance industry figures to get involved in the detail (although there are quite a few traders with time on their hands at the moment).

    And as a prospect reader sure you read Kaletsky’s article a couple of months ago:

    “A final event that turned crisis into disaster last year was the upsurge in oil and commodity prices. This too was linked to the faith in rational and efficient markets. The sudden escalation of oil and food prices in early 2008 was obviously a speculative panic, but governments around the world refused to understand this because of their assumption that the market is always right. Instead of introducing tighter market regulation to tame oil and food prices, governments and central banks assumed the commodity speculation reflected inflationary risks and responded by delaying interest rate cuts.”
    http://www.prospect-magazine.co.uk/article_details.php?id=10683

    My worry is that NGOs were equally asleep on the job in 2007 & 2008 – let’s make sure it doesn’t happen in 2009 – 2010

    Cheers

    Matt

  2. Duncan

    Thanks Matt, nice to hear from you. I’ve had to admit defeat for the moment on the ‘did speculation cause the food price crisis’ debate, simply because my economics aren’t up to deciding whether to believe Paul Krugman, who argued in the New York Times last year that if speculation drives up prices, then that should show in a rise in food stocks, as price would no longer balance supply and demand. No increase in stocks, ergo no speculative effect.
    I raised this with Steve Suppan who argues the exact opposite in an IATP paper, who replied
    ‘What Professor Krugman in April and the IMF still fail to appreciate is the role of unregulated Over the Counter trading and the commodity index funds in making irrelevant the neo-classical dogma about the spot price as the locus of theoretical equilibrium. As I try to emphasize in mentioning CBOT maize contracts in the UNCTAD paper, the number of index fund contracts hugely overwhelmed the physical hedging contracts, resulting in a “weight of money” effect that drove prices upward regardless of the physical supply demand relation. But regulators (and most economists) couldn’t understand what was happening (e.g. why weren’t futures prices and spot prices converging as futures contracts expired?) because of the 30-40 percent of futures contracts traded OTC and therefore not required to report to regulators. Just as price increases until the end of June 2008 could not be explained in neo-classical terms, nor could the 60 percent aggregate commodity price drop from July to November 2008 be explained, when there was no comparable drop in demand. As Professor Schulmeister points out in the paper I cite in my UNCTAD input, the “fundamentalist” explanation for this price volatility fails to meet the empirical test on the price upside or the downside.’
    At which point, I have to say I started to feel a bit out of my depth!

  3. gawain kripke

    Hi duncan and matt,

    Here in the USA, I’m seeing/feeling this debate acutely. The tentative judgement among analysts – including rather maintstream sources like IFPRI and WB – is that the immense shift of assets into commodities futures did have an inflationary impact on prices. But, as yet, I haven’t seen a good explanation of the channel for this phenom. It may be true, but no one quite understands it.

    I confess that I could spend more time trying to understand it – I’ve a thick folder of documents and analysis. But skimming them worries me that I’ll have gained some knowledge, but not wisdom in this material. The state of knowledge on this may not be up to the challenge.

    On Suppan’s analysis, I have to say that I find him dense and vocabularistic. In other words, “wtf”? Maybe he has insight, but if he can’t explain it in a way that is communicable, then what’s the point?

    Finally, if we don’t understand the problem, then it’s a dangerous business to lunge into solutions. Some in the NGO community of the US are supporting “reform” proposals and legislation. In fact, some of the regulating agencies appear likely to jump in and on the commodities trade. But, forgive my modesty, but I can’t support somethign I don’t understand. And if I’m not confident that we’ll be doing as much harm as good with these policy interventions, then I’d rather stand still.

    gawain

  4. Matt Griffith

    Hi Gawain, thanks for the reply Duncan.

    Couple of things:

    * Sounds like getting some research expertise would be useful for Oxfam – probably financial services industry – or perhaps linking up with UNCTAD, FAO or others to do further work? NGOs shouldn’t pretend to have all the answers, but – as the development box experience showed – they should help catalyse and support work and thoughts that wouldn’t happen without them.

    * On Krugman vs Suppan – one lesson from the sub prime crisis would be to take with a very large pinch of salt any pronouncement by economists that a price seems to be underpinned by sound fundamentals if they don’t understand what financial market actors have been doing with new financial instruments…

    Agree that Suppan can muddy the waters by citing Warren Buffet, but his paper seems a good clear exposition of the areas of concern and his multilateral recommendations seem fairly sensible.

    We know that commodity traded funds have been of sharply growing importance. We also know that there may well be a real problem of surplus liquidity searching out yield – and I’d place my bets on some strong speculative behaviour returning to food markets in late 2009.

    We also know that this resurgence of inflationary surges would cause not just problems for DCs but also cause serious pressure on the US, UK, EU and others in their current desire to fend off the bond vigilantes.

    The international political atmosphere would therefore be more sympathetic in 09/10 than it was in 07.

    No sensible government wants the level of uncertainty created by these price swings – either because, for G7 countries, it plays havoc with your inflation targeting (and hence your long term monetary steering wheel) or because, for DCs, it sends your import bill or export earnings into something approaching bipolar disorder.

    For DCs this famine and feast destroys your ability to plan, creates false incentives to spend in the good times and puts huge pressure on your fiscal position in the bad times or vice versa (the economic equivalent of sailing into a zone where you can no longer pick up magnetic north).

    Time for some further work on it I think

    Cheers

    Matt

  5. Matt

    Hi Duncan,

    Interesting to see the US authorities via the Commodity Futures Trading Commission are now looking to crack down on futures contracts for that commodity of overwhelming importance to the developed world – oil.

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/5770944/US-plans-to-crack-down-on-oil-trade-speculators.html

    And also interesting to see that financial market traders are saying that if the US does this they’ll move to the UK.

    Good old Gordon

    If it works for oil shame not to get food in on the act.

    Cheers

    Matt

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