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Speculative Investment: The Missing Factor in Global Food Price Increases

April 14, 2013
Zimbabwean Peasant Farmer

Zimbabwean Peasant Farmer

The WorldWatch Institute published a report yesterday noting that global food prices continued to increase in 2012. After a protracted period of declining prices between 1960 and 1999, global food prices have increased at an average annual rate of 6.5 percent between 2000 and 2012. The report includes the usual wide range of factors contributing to the general trend: the volatility inherent to agricultural commodities markets, weather, climate change, biofuel policy, increasing energy and fertilizer prices, export restrictions, increasing global food demand (especially from China) and low global food stocks.

Normally I’m a big fan of the WorldWatch Institute. But in this case, I think their report suffers from two errors.

First, I’m always suspicious of the blame often placed on Chinese (and sometimes Indian) food demand. Yes, meat consumption in China and India is increasing, leading to increased demand for soy and other animal feed crops. But meat consumption in China and India nevertheless remains far below that of the United States and Europe. A 2012 report in The Economist noted that per capita meat consumption in the United States averaged 125.4 kilograms (kg)  per year. Beef represented 42.1 kg of that consumption. China, by contrast, consumed 54.1 kg of meat per person per year (and just 4.7 kg of beef). India ranked last of 177 countries in per capita meat consumption, averaging just 3.2 kg per person per year.

Annual Per Capita Meat Consumption by Country (in kg)

Annual Per Capita Meat Consumption by Country (in kg)

 

Yet rarely do we place the blame for high food prices on dietary preferences in developed countries. Rather, we emphasize marginal increases in demand from China and India (because of their population size) rather than critically looking at our own consumption patterns in the developed world.

Second, their list is incomplete. They overlook what are arguably two of the most important factors affecting global food markets, namely, agricultural trade policy in the developed world and speculative investment in agricultural commodities.

Food subsidies in the developed world have long undermined agricultural production in the global south. As food historian Filipe Fernandez-Armesto observed in an editorial in the Bangladesh News, “Ironically, cheap food has been a main cause of the present shortages, because it has made food production economically unattractive.” Farmers, who often lack any other way to earn an income, intensify production in response to declining prices. But subsidies in the developed world locked Southern producers out of northern markets. At the same time, subsidized exports from the developed world devastated local agricultural markets in the global south.

More importantly, though, WorldWatch’s report fails to consider the impact of both the marked increased in speculative investment in agricultural commodities and the sharp increase in land grabs in the developed world. This is particularly telling since the period in which they observe the sharpest increase in both prices and price fluctuations (2006-present) also corresponds with the deregulation of global agricultural commodity markets, the flood of new speculative money into commodities futures, and the sharp increase in land grab activities.

A report by the United Nations Food and Agriculture Organization warned that 2013 could witness a worldwide food crisis. Citing extreme weather events sparked by climate change, declining global grain reserves, and rising food prices, the world’s poorest and most vulnerable could face real challenges in securing sufficient food, possibly sparking renewed political protests. Addressing the challenge requires addressing all aspects of global food production, including the destabilizing effect speculative investment and global land grabs have on food markets.

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