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Revising Speculation and the Global Food Crisis

February 2, 2012

Last March I argued that the root cause of the sharp increase in global food prices in 2007-08 and again in 2010-11 was speculative investment. While mainstream analyses of the food price spikes tend to focus on variables like increased demand from China and neo-Malthusian assertions population growth outstripping food production, I think they are—in short—misguided.

Everywhere we turn, we see calls for more investment to increase total food output. Bill Gates—who certainly is willing to put his money where his mouth is—argues that countries must embrace genetically modified seeds and high tech agriculture or face starvation.

While increased investment in agriculture is certainly an important component of any strategy to improve the plight of farmers in the developing world, such investment must be targeted. Further, there is no guarantee that increasing yields will necessarily address the underlying problems of hunger or of increasing food prices for urban consumers. Indeed, total farm output increased during both the 2007-08 and the 2010-11 food crises. It was not a decrease in supply but an increase in demand that led to the price spikes. And perhaps most importantly, it was not an increase in consumer demand for foodstuffs that drove the price of basic grains out of reach for millions in the global south. It was the “speculative scrum,” as Kauffman terms it, if futures traders and commodities brokers who thrive on wide fluctuations in commodity prices.

In their paper entitled “The Food Crises: A quantitative model of food prices including speculators and ethanol conversion,”  economists Marco Lagi, Tavni Bar-Yam, Karla Bertrand and Taneer Bar-Yam provide a strong explanation of the relative role of various factors in recent price fluctuations. Their conclusion: “the dominant causes of price increases are investor speculation and ethanol conversion…The two sharp peaks in 2007/2008 and 2010/2011are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion.” (See figure below from their paper).

But despite the overwhelming evidence that price changes are driven by speculation, there seems to be little political will to reign in such activities. However without such a fundamental change, increased productivity will likely continued to be outpaced by hot money seeking a quick profit. In the balance are the lives of many.

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