If we can’t prove that speculation drives food prices, should we regulate it anyway?

One of my more wonk-mind-blowing moments last year was refereeing a debate about financial speculation and commodity prices between Oxfam’s Rob Nash and a UK Treasury wonk who wished to remain nameless. I couldn’t understand either of them (even by international development standards, the language is really weird – try ‘contango’ or ‘backwardation’).  I tried to get them to slug it out on the blog, but the Treasury type declined.

So it’s good news that Stephen Spratt of IDS (right) has written a blog post and 20 page paper on food price volatility and financial speculation – Stephen is a City poacher turned gamekeeper, and one of the clearest thinkers I’ve come across on financial markets.

The paper considers the case for and against the prosecution. Stephen sets out (and tries to answer) the key questions:

• How has the relationship between financial actors and food commodity markets – particularly futures markets – changed in the last ten years?
• What have been the benefits and costs of the increased role of financial sector actors in these markets?
• How might the balance between benefits and costs change in the future?
• What reforms, if any, are needed to ensure that benefits exceed costs?

The paper helpfully unpacks different kinds of ‘speculation’ – lumping them all together is really unhelpful, and assesses the impact of high prices and volatility on different groups (see table).

But the most valuable contribution is his thinking on complex systems. Sure there is a clear correlation between rising food prices, volatility and increased financial market activity in commodities, but proving the causal link between them is a different question. His conclusion: ‘Establishing cause and effect has proven to be impossible.’

The pro-market types consider this enough grounds to oppose regulation of speculation. Stephen disagrees. He argues that we need to think harder about the costs and benefits of action if the critics of financial speculation are right, and if they are wrong. If they are right, and speculation is driving food markets, then regulation would help prevent the extremely damaging social impacts of high and volatile prices. If they are wrong, and we regulate anyway, the damage would be limited. So in a version of the precautionary principle, he comes down in favour of regulation. Here’s his conclusion:

‘The policy responses that different commentators favour are strongly influenced by two things. First, their view on the link between increasing financial speculation in futures market and price movements in spot markets. Second, their view on the relationship between financial market prices and underlying economic fundamentals. Reasonable people take different view on these questions, and it is not possible to answer them definitively. On the balance of evidence, however, we have proposed the cautious use of the precautionary principle, largely because of the fundamental importance of global food markets to the lives of billions of people.

Set against this, the ‘costs’ of placing greater curbs on financial participation in food markets seem relatively trivial. Some argue that reducing speculation would reduce market liquidity, increasing hedging costs. But there has been no reduction in hedging costs as financial engagement has grown. The only real cost, therefore, may be a reduction in the profitability of some financial institutions. Set against the potential benefits, this seems a price well worth paying.’

I’m convinced. You? The next step would be to apply the same precautionary principle/complex systems approach to different kinds of speculation and different forms of regulation – doubtless a very messy argument. Has anyone had it yet?

What’s New in Development? Introducing the Second Edition of ‘From Poverty to Power’

Here’s what the new edition of FP2P adds to the first (in case you want to save yourselves a few quid). This was recently published by the UN University as part of its ‘WIDER Angle’ series

Updating a book on contemporary events can be unnerving. In the intervening years, events and new thinking combine to expose theweaknesses of any text. Even more so with a book like ‘From Poverty to Power: How Active Citizens and Effective States Can Change the World’ (henceforward, FP2P), whose second edition has just been published. In trying to present an overall NGO narrative on development, it offered a particularly rich variety of hostages to fortune.

FP2P’s core argument was that the driving force behind development (understood in the Sen formulation as ‘freedoms to do and to be’) is a combination of active citizens and effective states. Why active citizens? Because people living in poverty must have a voice in deciding their own destiny, fighting for rights and justice in their own society, and holding the state and private sector to account. Why effective states? Because history shows that no country has prospered without a state than can actively manage the development process in terms of infrastructure, rule of law, human capital and industrial upgrading. In addition, the first edition stressed the importance of inequality and redistribution, both in terms of social and economic waste, and social justice.

The three shocks, and a slow-motion train wreck

What’s new in the second edition? An update chapter covers the main events of the intervening years, which it identifies as three shocks: the global financial crisis; the food price spike(s) and the Arab Spring; and a slow-motion train wreck in the form of climate change.

The global financial crisis was a watershed event, triggering historic geopolitical change, including the shift from G8 to G20 and the rise of the emerging powers. It drew attention to the risks of an excessively ‘financialized’ global economy, but failed to lead to a reining in of the excessive size and volatility of ‘hot money’, condemning us to future financial crises, possibly starting with Europe in the coming months. More broadly, the advent of the G20 has failed to re-energise the multilateral system, with global talks on climate change, trade and arms control all paralysed. Some commentators are even talking of a ‘G zero’, with no one in charge.

The food price spike, which in many countries traumatized the lives of poor people to a much greater extent than the financial crisis, reversed a decades-long trend of low and falling prices, thus threatening the long-term progress on hunger and nutrition.  This has led to renewed attention to food security worldwide, but with some unfortunate side effects such as ‘land grabs’ across the developing world by investors from rich countries.

The Arab Spring confirmed the importance of active citizenship in processes of change, and made us think much harder about the role of women (who were very active) in Islamic contexts, along with the granular and complex nature of social movements.

But an even more intriguing aspect of updating the book has been trying to identify how these events, along with the research and ‘public conversation’ of the development world, have changed the way we think about development.

Taken together, the three shocks, along with the growing frequency of extreme weather events, have made us much more aware of the impact of volatility, risk and vulnerability on the lives of poor people. That leads both to a focus on building resilience, and trying to dampen or prevent them in the first place. Shock absorbers, from social protection to food reserves to ‘circuit breakers’ in financial markets, have become a much more central part of the development debate.

Accounting for complexity: shifts in thinking and communicating

But it goes deeper than that. The unpredictability and systemic nature of the shocks has driven home the inadequacy of development thinking predicated on linear processes of change. That raises real challenges for traditional systems of planning and measuring results. Oxfam recently sent a complexity physicist to visit its programme in northern Kenya, and the insights from this kind of interdisciplinary work are likely to play an important role in transforming our thinking in coming years.

A further consequence of systems thinking is that we are trying to work out the implications of seeing the world’s ecosystem as a closed system, operating within clear planetary boundaries. Kate Raworth’s work on how to combine these planetary boundaries with a ‘social floor’ has great promise in this area.

Over the last five years, the nature of authorship itself has been transformed by technology. The From Poverty to Power blog, initially launched to promote the first edition, has rapidly acquired a life and readership of its own. It has also provided the first draft of many of the updates incorporated into the second edition. Twitter has only added to the daily churn of links, ideas and opinions. Wrestling to impose a coherent narrative on the greatly increased information flood is one of the growing challenges of authorship.

So how has the first edition survived the assault of history?

I think the central argument still holds—that development happens primarily through the interaction of citizens and states, with aid and the global system playing only a second order role. However climate and finance are two examples of collective action problems that cannot be resolved at national level. The paralysis of international action in those areas is perhaps the darkest cloud on the development horizon, threatening to reverse sixty years of unprecedented human progress.

Inequality and redistribution have become far more mainstream debates, with even the IMF weighing in on how high levels of inequality imperil both growth and stability. Tighter constraints placed by ecosystem boundaries (for example on the right to pollute), further heighten the importance of who gets which slice of the pie.

Many people, both inside and outside Oxfam, have questioned the absence of the private sector from the citizen-state binary. My response has been that an effective state creates the enabling conditions in which private enterprise can flourish. However, I now think that I, along with many others, confused and conflated the roles of private sector, markets, and economic power. The lacklustre response to the financial meltdown has demonstrated the central role of economic power, and we do need to make the visibility and regulation of economic power a more central part of our narrative.

Finally, one area of the first edition has expanded enormously in the last five years, its focus on ‘how change happens’. Better understanding of processes of change, and the accompanying analysis of the distribution and redistribution of different kinds of power within change processes, is rapidly becoming a central component of development thinking at Oxfam and many other development agencies. It is also the subject of my next book—now there’s a hostage to fortune!

And in case you missed it, here’s me coveringe the same ground on video, reading an autocue, waving my arms and looking slightly deranged

Prices that bounce – Naomi Hossain on the human face of the food crisis

Oxfam and IDS are starting work on Life in a Time of Food Price Volatility, a 4 year project combining qualitative and quantitative methods to track the human impact in communities in 10 countries, building on the methodology behind our 2011 report, Living on a Spike. Richard King at Oxfam and Naomi Hossain at IDS are running the project. Here, Naomi (right) reports back on one research trip to the rubber tappers of Indonesia.

I’m just back from South Kalimantan, part of Indonesian Borneo, where the idea that future food prices are likely to be jump even higher because of extreme weather events feels very real. Climate, energy, food and global economic crisis all feature in an alarming combination of volatilities. In the Banjarese community where IDS/Oxfam partners SMERU have been researching the social impacts of crisis since 2009, most people are rubber tappers. The past year has been particularly up-and-down, mainly down, even by the elastic standards of rubber producers.

We went to see one family, where the newly-single mother and household head – call her Siti – panicked when she saw us. ‘I’ve already paid’, she said. ‘I’ve paid for this month’. She thought we were debt collectors and was already behind on her first (I suspect also last) instalment for her new motorbike, easily the most popular means of getting about Indonesia. Siti needed it because she had recently shed her violent unfaithful husband, and was looking after four children on the wages of a rubber tapper (her working hours are 2am till 10am, when the rubber is fresh and the weather is cool).

The wages of rubber tappers are well down on last year, mostly because rubber prices have been affected by the double dip in the global economy, but partly due to the unusually dry season. Sofian told us he and his wife Fatiyah were earning 2.25 million (about US$ 240) rupiah per month this time last year; now they were getting 600,000 to 700,000 (US$ 63-73), depending on quality and quantity of their rubber. That is for two adults putting in a shared 7 hour shift between 4 and 9am, 6 days a week.

But as the price of rubber has sunk, the price of most food has steadily risen. People still eat rice in the same quantities or mix it with noodles – work is physical and they need the energy – but have cut down on fish. And, presumably because of the soybean crisis in the US, the high protein staple of the poor, tempe (soybean cake), has doubled in price. As the motorcycle grocer explained as he sped off, the price is the same, so he halves quantities.

Focus groups told another story. Their main problem, they tell us, is water. Some people think it is deforestation that has caused the water problems in Kalimantan, but in this part of Banjar, people point to the growing presence of the coal-mines. A popular community development  programme (PNPM) devised a water pump project in an area with a water source, only to find that by the time it was installed, the water had disappeared, sunk without a trace, as the coal-mines dug deeper into the earth. The mining company has bought up lots of local land, at cheap but still attractive prices, so many local people no longer farm their own land. But they are also too poor to get the education they need to work for the mining companies as drivers or mechanics. It’s all lose-lose here, at least until the rubber price picks up or food prices go down again.

Naomi Hossain is a Research Fellow in the Participation, Power and Social Change research team at IDS. This piece first appeared on the IDS team website.

Extreme weather, extreme prices: what will more erratic weather do to food prices?

Oxfam Climate Change Policy Adviser Tracy Carty summarizes her new paper, published today

With greenhouse gas emissions at an all time high, and the world lurching towards a third food price spike in four years following the worst US drought since the 1950s, there is an alarming gap in our knowledge – how will an increase in extreme weather caused by climate change affect future food prices?

To date, research on food prices and climate change has looked almost exclusively at the averages: how gradually rising temperatures and changing rainfall patterns will affect long-run average prices. It points to a future of higher food prices: Oxfam-commissioned research last year suggested food prices could double in the next 20 years; with up to half the increase caused by climate change (see also research by IFPRI and Stanford University).

Alarming, but only half the story. Climate change will also lead to an increase in extreme weather, such as droughts, floods and heatwaves. As today’s US drought lays bare, extreme weather can wipe out harvests and drive up prices precipitously in the short term. But current research does not account for how these extremes might affect future global food prices. (Though there has been some regional analysis).

Oxfam felt it was time to have a go, so we commissioned some more research from the Institute of Development Studies. Published today, it uses CGE modelling to look at the impact of extreme weather scenarios on global food prices in 2030. CGE models have their flaws and are certainly not predictive instruments, but they do help us think through broad possible scenarios for whole systems.

The research highlights some top line trends that can plausibly be expected in a world of more frequent and intense weather extremes. While average prices could double by 2030, the modelling suggests that one or more extreme events in a single year could bring about price spikes of comparable magnitude to two decades of projected long-run price increases.

The research suggests that in 2030 the world could be even more vulnerable to the kind of drought happening today in the US, as dependence on US exports of wheat and maize is predicted to rise, whilst climate change increases the likelihood of extreme droughts in North America. The US Department of Agriculture recently estimated that climate change could cost corn belt farmers between US$1.1 to $4 billion annually by 2030. Even based on a conservative scenario, the modelling shows a drought of similar magnitude to the US drought in 1988 could raise the price of maize by as much as 140 per cent in 2030 (see fig 2).

The modelling also shows dramatic impacts in sub-Saharan Africa in 2030 – the consumer price of maize and other coarse grains in southern Africa could increase by as much as 120 per cent, on top of already higher average prices (see fig 3).

Food security experts working on the next IPCC Assessment recently warned that governments should take more account of how weather extremes could affect food supplies. Because if the climate becomes increasingly erratic, food production and prices will too, with devastating consequences for the lives of livelihoods of people living in poverty. 

Governments ‘stress-tested’ the banks after the financial crisis.  Our global food system is also too big to fail, and needs stress-testing to fully assess and address its critical thresholds in relation to climate change. Stress testing would seek to understand feasible worst case scenarios and identify the levels, locations and likelihood of vulnerability that could occur.  This includes major crop producing regions most at risk; the impact of multiple harvest failures in the same year, as well as the cumulative impact of significant yield shocks becoming more common; impacts on food deficit low income countries; and interactions with other major threats to the food system, such as high oil prices.

This research is just one more contribution to the overwhelming case for action. The necessary policy responses are well documented: reducing emissions, adapting to climate change, and building the resilience of markets and people in poverty (see here, here, here and here). The real unknown is how bad things have to get before we start to see concerted action.

Tracy Carty is Climate Change Policy Adviser at Oxfam GB

How poor people get through crises: some excellent ‘rapid social anthropology’ from IDS and the World Bank

On Wednesday, I spoke at the launch of a new book, Living Through Crises: How the Food, Fuel and Financial Shocks Affect the Poor, by Rasmus Heltberg, Naomi Hossain and Anna Reva. It’s a joint World Bank and IDS publication, also available for free online. I think it could prove quite influential.

The starting point for the book is that we live in a world increasingly characterized by shocks (economic, political, climatic), rather than steady incremental change, but there is a huge hole at the centre of our what this means for poverty. With a few exceptions (e.g. the early warning system on malnutrition), we have only the vaguest idea of how such shocks are affecting poor women, men and children in real time. Instead, the ‘poverty community’ relies on some decidedly blunt instruments – models (poverty rises by X million every time GDP falls by Y%) or household surveys with significant time lags. Moreover both these tools generally reveal little about the lived experience of being poor – the social exclusion, anger, shame, humiliation and fear that can lead to revolutions or despair. Yet through this fog of ignorance, policy makers and aid donors must take decisions in real time – what can be done?

Living through Crises tries to show how that gap can be filled, with 8 country case studies and a global synthesis on the impact of the multiple crises of food and fuel prices, and financial systems, that rocked numerous economies from 2008-11. The studies are both rigorous and qualitative (not an oxymoron, whatever some quants say) in what Robert Chambers in his excellent foreword terms an exercise in ‘rapid social anthropology’. The methodologies are varied, but typically involve focus group discussions, repeated over a period of months or years, in a sensitive, skilled effort to dig into the experience of poor people living at the sharp end of a global economy in turmoil.

What does this add to the traditional ways of exploring the impact of crises? Firstly, some surprises, for example that the informal sector is hit harder than the formal sector, even though a global economic slowdown hits international trade and finance first; that informal, local safety nets (religious organizations, communities, family and friends) are in general more significant sources of support than the state.

Second, this exercise in ‘deep listening’ identifies and fills some important gaps in our understanding – that indebtedness to microfinance organizations can become an acute burden in a crisis, or that intra-family violence (men on women, adults on kids) is likely to increase.
This approach identifies the importance of social capital and relationships: ‘marginalized and poor people with weak social capital experienced the most severe and irreversible hardships’. But it also points to the erosive nature of coping – for all their energy and invention in confronting shocks, poor people run down their assets as well as their stock of social capital, with knock-on consequences for their future well-being. Rapid social anthropology also identifies gender differences, for example in the impact of crises on the care economy, which are usually overlooked altogether by conventional analyses.

Food riots in Mozambique

All this echoes Oxfam’s own faster (we published two years ago) but less in-depth qualitative research on the gender and wider impacts of the crises, and there is overlap in both past work and future plans (we are just starting a 10 country follow up to the qualitative work on food prices conducted with Naomi Hossain at IDS last year).

The book launch (in a venerable committee room at the House of Commons), generated some thought provoking discussion:

Role of the State: the research finds that the state is often ‘absent’ during a crisis. Rather than turn to the authorities, poor people turn to family and friends, their religious organizations, and other community structures. So does that mean we give up on state provision of social protection, crisis response etc etc? No. But we need to think differently. For example, adopt a ‘Portfolios of the Poor’ approach of researching what community ‘social coping’ mechanisms function well and support those, as well as identifying gaps that the state needs to fill directly; or identify which aspects of state provision are effective and back those – school feeding programmes emerged as really significant.

Beyond the state: but the research does suggest looking beyond the state and seeing how to cooperate with the other institutions that matter. What about providing disaster management training to religious leaders? Putting money into community savings schemes as a way of getting cash quickly into a shock-hit village? I blogged on a discussion with Robert Chambers on this a while back, and the ideas still make sense (at least to me).

The links to structural adjustment: Those of us who worked on structural adjustment programmes in the 80s and 90s recognized a lot of similarities with the social impact of (and response to) structural adjustment programmes – e.g. Caroline Moser’s work on their erosive impact in Ecuadorian shanty towns. The other link is that SAPs in some cases increased vulnerability to shocks, for example by liberalizing financial markets, privatizing state banks and thus reducing the range of levers available to governments.

More coverage of the launch in the Guardian.

Food and Finance: a little less speculation, a little more action please…

Some good sense on a polarised topic from Ruth Kelly, Oxfam economic policy adviser and co-author of a new paper on speculation and food prices.

When they work properly, financial markets are great at greasing the cogs of the food system. Why, then, are so many people blaming speculation for recent food price spikes?
 
First here’s how markets ought to work. People all along the food supply chain use them to hedge their risk. At the moment food prices are exceptionally high and rising and, as they rise, they are shooting up and down in a completely unpredictable way. So for a premium, speculators guarantee a future price for those buying and selling food, taking a gamble that prices on the market will be higher than the price they have guaranteed so they can pocket the premium without having to cough up – if things go the other way, the speculators may lose but they are big enough to take that risk.
 
There are other benefits. Since there is very little public information about physical markets in agricultural commodities, buyers and sellers of food rely on financial markets to help them determine the right price. Each speculator comes with a little bit of information that they share by buying and selling, bringing the price of agricultural derivatives very close to the price producers should be charging for food.
 
Better still, financial markets allow agricultural assets to be turned into cash quickly and easily. This is crucial in a market where assets can only be sold in bulk at harvest, leaving participants with major cash flow problems. Having a bunch of savvy speculators monitoring market dynamics and in response, buying or selling agricultural derivatives, brings liquidity, moving money around while the crops are still in the ground to help the market work more efficiently.
 
That’s why financial markets are great when they work. But right now, they’re broken: the deals that are being done have lost their grip on the reality of food production and distribution. Even analysts who think that there is no link between speculation and food price volatility admit that the way the markets are working at the moment is making people very nervous. And nerves breed panic and panic inflates bubbles and bubbles eventually burst.
 
First, socially useless speculation, where agricultural derivatives are bought and sold irrespective of the price, with other speculators following like sheep, can lead to a situation where everyone is buying and no-one is selling and prices keep on spiralling upwards. Instead of bringing liquidity to the market, this type of speculation sucks it out.
 
Add this to the growing presence of investors with so much money that they can single-handedly move prices independently of supply and demand, at least in the short term. When such speculators pile in on one side of the market with little regard for price, those relying on financial markets to give them the right price may as well be plucking prices out of the air.
 
And as prices of commodity derivatives shoot out of control and become increasingly volatile, it becomes more and more expensive to hedge risk. Those who rely on financial markets to guarantee prices for their physical crops must pay higher and higher premiums for the privilege. These days, only very large businesses can afford to hedge their risk, leaving smaller producers and traders, who are already more exposed to risk than big agribusiness, without protection. And the increased costs are passed on to consumers.
 
Expert opinion is evenly divided on another key accusation – whether speculation contributes to volatile food prices. Different researchers make the same data say different things, depending on their underlying assumptions and methodologies. And in any case, the data is full of holes. Nonetheless, the fact that there is so much debate means that there is at least a strong case to answer. Because the risks of letting current practices continue, if the critics are right and they are indeed exacerbating food price volatility, are much higher than the risks of acting to make financial markets more transparent and efficient, a precautionary approach should be taken to regulating socially useless speculation.
 
The first step is to get a better idea about what is actually going on. Publishing comprehensive data will help prevent panic and herding, and allow a better assessment of whether there is a link between speculation and food price volatility. But transparency is not enough. The second step is to regulate markets by limiting certain types and volumes of speculation, to try to prevent huge amounts of money spent by very big players from skewing prices and causing panic. The risks of doing nothing far outweigh the risks of regulating.
 
Decisions are already being made at the G20, in the EU and in the US. Those with a vested interest in continued volatility are lobbying hard. Those hit the hardest by volatility – small-scale producers whose livelihoods depend on receiving reliable prices for their produce, consumers in the poorest countries who spend up to 75 percent of their income on food – have a much weaker voice. That is why it is so important to listen and to take action over the next few months and beyond. The right reforms will go a long way to making financial markets work for the people who contribute to feeding everyone on our planet.

Introducing Growbag, a round up of new research on food, farming and climate by guest blogger Richard King

I can’t keep up with the flood of research on the issues related to the GROW campaign, so my ever-hungry colleague Richard King is riding to the rescue……

This occasional ‘blog series is a nutritionally dense (but non-exhaustive) collection of links, highlighting major recent publications and miscellaneous happenings that are relevant to Oxfam’s GROW campaign.

Like any growbag, this series requires planting and watering (to overextend a shocking pun). Seedlings for inclusion in future posts (along with any suggestions for improvements) can be emailed to research@oxfam.org.uk. Let’s get started:

1. ‘Price volatility and food security’ - UN Committee on World Food Security’s (CFS) High Level Panel of Experts on Food Security and Nutrition (HLPE)

The report considers the causes and solutions to higher food prices and higher levels of food price volatility. It proposes three different explanations for recent international food price increases.

“The first explanation defines food price rises as a problem of agricultural price volatility‘ (implying that high prices will not last) and as a quasi-natural and permanent problem of agricultural markets. The second explanation points to the existence of periodic international food crises (1950s, 1970s, and present) and claims they can be explained by the dynamic of investment in agriculture. The third explanation sees current price increases as an early signal of coming and lasting scarcities on agricultural markets. The report does not choose between these three explanations. Instead, it emphasizes their complementarities. For example, the need for significant public investment in agriculture will be conceived of differently if the third explanation (coming scarcities) is taken into account. The main concern here is that short and medium-term measures should be compatible with and even contribute to resolution of the long-term problems.”

Key policy recommendations to address price volatility and its consequences for food security fall under six objectives:

- Building a food security oriented trading system
- Precautionary regulation of speculation
- International coordination of national storage policies
- Food reserves and the World Food Programme
- Refocusing public investment to achieve long term food security
- Curbing the growth of developed country demand for agricultural products

One aspect of the report that has been widely picked up on is the relative contribution to growing cereal consumption of biofuels and emerging markets’ demand for food. From Triple Crisis:

“…despite continued claims that growing demand for meat in China and India is driving food and feed demand, the growth in demand for cereals, excluding biofuels demand, averaged 1.3% since 2000, only slightly higher than in the 1990s and slower than in the previous three decades. Biofuels demand added half a percentage point to that global demand.”

Thus, one of the report’s more striking recommendations is “Given the major roles played by biofuels in diverting food to energy use, the CFS should demand of governments the abolition of targets on biofuels and the removal of subsidies and tariffs on biofuel production and processing.” 

The similarities with the earlier inter-agency report for the G-20 are striking.

2. ‘Policy Solutions to Agricultural Market Volatility’ - ICTSD
This takes a more pessimistic view of what is doable in the face of price volatility:

“A review of possible options for reducing volatility on international markets shows that none of them is likely to work… The conclusion is as disappointing as it is important. There is no effective way of doing much about price behaviour on world markets for agricultural commodities. These markets will continue to exhibit volatility, including the occasional extreme price spike, and there is no recipe against that malady. The only available policy response, then, is to try and minimize the negative implications of volatility.”

Developing countries, it seems, have more limited options: Trade policies can help shield domestic markets from international volatility, but they can’t target the most vulnerable and they exacerbate international instability. Domestic market interventions are deemed ineffectual, as are national stock policies (though there may be a role for emergency stocks in import dependent countries). Social safety nets can help poor consumers ride out the storm, but they need to be implemented when the sun is still shining, not when the storm is raging.

3. ‘Price formation in financialized commodity markets: The role of information’ – UNCTAD
UNCTAD makes the case for “soft regulation” of financialised commodity markets (increased transparency of both physical commodity stocks, and in financial exchanges and OTC markets; tighter regulation and limits on financial players’ positions). It also suggests considering a financial transaction tax to slow down investors’ activities in financial commodity markets. Why? Because, in the absence of full information, financial traders are like rampaging sheep (above): “Trading decisions are… taken in an environment of considerable uncertainty. In such a situation, it is rational to follow other participants’ trading decisions… In an environment of herd behaviour there are limits to arbitrage. Acting against the majority, even if justified by fundamentals, may result in large losses, often of borrowed money. It may therefore be rational for market participants to ignore their own information and follow the trend.”

4. ‘A Warming Planet Struggles to Feed Itself’ - New York Times
“For nearly two decades, scientists had predicted that climate change would be relatively manageable for agriculture, suggesting that even under worst-case assumptions, it would probably take until 2080 for food prices to double. In part, they were counting on a counterintuitive ace in the hole: that rising carbon dioxide levels, the primary contributor to global warming, would act as a powerful plant fertilizer and offset many of the ill effects of climate change. [the ‘carbon fertilization effect’] Until a few years ago, these assumptions went largely unchallenged. But lately, the destabilization of the food system and the soaring prices have rattled many leading scientists.”

5. ‘Biofuels and Climate Change Mitigation’ - World Bank
“If biofuel mandates and targets currently announced by more than 40 countries around the world are implemented by 2020 using crop feedstocks, and if both forests and pasture lands are used to meet the new land demands for biofuel expansion, this would cause a net increase of greenhouse gas emissions released to the atmosphere until 2043, since the cumulative greenhouse gas emissions released through land-use change would exceed the reduction of emissions due to replacement of gasoline and diesel until then.”

Pretty remarkable finding. However, “if the use of forest lands is avoided by channeling only pasture lands to meet the demand for new lands, a net increase of cumulative greenhouse gas emissions would occur but would cease by 2021, only a year after the assumed full implementation of the mandates and targets.” Better. But this would still require mass-scale livestock intensification and much-improved productivity on remaining pasturelands to prevent second-order, knock-on deforestation by people who would otherwise be using the pasture lands given over to biofuels. And there’s still the small issue of having enough land to feed 9 billion people by mid century…

6. Meanwhile, a report for ICTSD ‘The Impact of US Biofuel Policies on Agricultural Price Levels and Volatility‘ finds that US ethanol subsidies may have artificially inflated maize prices by as much as 17 percent in 2011. 

7. ‘Protein efficiency per unit energy and per unit greenhouse gas emissions: Potential contribution of diet choices to climate change mitigation’ - Food Policy journal
Interesting new paper on the impact of our dietary choices on climate change. Looking at the production and transportation of 84 common animal and vegetable foods to a port in Sweden, it finds “animal-based foods are associated with higher energy use and GHG emissions than plant-based foods, with the exception of vegetables produced in heated greenhouses.”

Importantly, it also considered the nutritional value (in terms of protein) of the foods per unit of energy and GHG emitted. “Whether in terms of energy spent or emissions of GHGs, this study showed that the efficiency of delivering protein… was much higher for plant-based foods than for animal-based. In addition, plant-based protein had the specific attribute of increasing efficiency with increasing protein content of the food. Therefore, strategies aimed at feeding a growing world population and reducing contributions to climate change should include measures to encourage a more vegetarian diet with the focus on consuming vegetable products with high protein content, such as legumes, nuts and grains.”

For further analysis related to this, see the excellent Food Climate Research Network

Living on a spike – how are high food prices actually experienced by people living in poverty?

The G20’s Agriculture Ministers are meeting for the first time today and tomorrow, in Paris, a sign of the rising importance of food security and related issues, following the recent chaos in global food prices (see graph). Oxfam is focussing its lobby efforts on biofuels (in many cases, a bad thing, diverting food to fuel and not even helping reduce carbon emissions) and food reserves (a neglected way to smooth the spikes in prices). The FT curtain raiser says the ministers are divided and set to duck the big challenges on biofuels and export bans, but also covers their efforts to improve data on food stocks - a potentially useful way to reduce price volatility.

Oxfam (or at least some of our research partners) has also done something rather radical. When a shock hits, all the development wonks rush for their models and start calculating the impact on ‘the poor’, based on how many millions slip into poverty when prices rise by X or GDP falls by Y. What’s extraordinary is how seldom researchers think to go and talk to poor people themselves. When you do so, you get answers full of depth and surprise, as we found out in ‘Living on a Spike’, a new report on the impact of the 2011 food price crisis, published today by Oxfam and the Institute of Development Studies. Naomi Hossain and I had a piece in the Guardian yesterday summarizing the findings.

The researchers returned in March 2011 to eight community ‘listening posts’ in Bangladesh, Indonesia, Kenya, and Zambia, that were previously visited in 2009 and 2010, building up an increasingly valuable time series of how food prices and their impact have varied over time. Using focus groups and other participatory techniques, they asked: What has happened to prices and wages since last year? How are people adjusting to these changes? What do people think causes food price volatility, and what do they think should be done about it?

The overall impact of the 2011 food price spike has been to ratchet up inequality, producing a pattern of ‘weak losers and strong winners’. The losers – those already struggling in low-paid, informal sector occupations such as petty trading, street vending, casual construction work, sex work, laundry, portering, and transport – are doing worse. Many have seen stagnant or only slightly raised rates of pay, which have been swallowed up by higher food prices, combined with more erratic access to work or customers. Small-scale farmers and small market and food traders have not generally done well, despite the high price of food. High input costs and the squeeze on people’s purchasing power has meant that profits from growing and selling food remain low for those with least scope to diversify and spread their risk.

These people are clearly worse off than last year. They strongly believe that the government is not on their side in their efforts to eke out a living. Regulations on where people can run their businesses or provide their services, police harassment, and unfavourable new laws mean that making a living has got harder, not easier, for many in this group over the past year.

But some groups – usually those who were already relatively better off – have done better than last year. Commodity producers and export sector workers have largely benefited from the global recovery, as have some people in other occupations linked to these groups.

People are adjusting to high food prices in complex ways. While some people are eating less and going hungry, the more usual pattern is for people to shift to lower quality, more boring food and less diverse diets.

The effects differ greatly by gender: women come under more pressure to provide good meals with less food, and feel the stresses of coping with their children’s hunger most directly. Often women go without. As one labourer from Bangladesh explained, ‘The women make the ultimate sacrifice. They take their food after everyone is done. We have completely forgotten the taste of beef.’

These stresses push women into poorly paid informal sector work, competing among themselves for increasingly inadequate earnings. Men also feel the effects: the food price rises severely undercut their ability to provide for their families, leading to arguments in the household and fuelling alcohol abuse and domestic violence. As one Kenyan woman complained, ‘They come home drunk and even feed on the leftovers for our children.’ In the worst instances, couples split up or look for better-off partners to cope with the tough times.

Talking to people living in poverty reveals just how multi-faceted the impacts of the food price spike are, touching on almost every aspect of life. People are spending less on personal items like clothes and cosmetics, and scaling down their social lives. A rickshaw driver from Bangladesh graphically explained:  ‘With my income, I don’t have any money after buying food, so how can I have the luxury of buying more underwear?’… People can see my ass. And the thing is, as I wear the same underwear for the whole week, people get a bad smell from me. What can I do?’

Government has provided some support, but this has generally failed to protect people from the effects of rising prices. The result of these adjustments is not generally starvation, but an overall increased level of discontent and stress. Poor people are having an even more difficult time getting by.
 
The extent of people’s discontent with the situation becomes clearer when asked about their opinions on the causes of food price rises, and what should be done about them. Few people think international food prices are an important cause; some even dismiss such factors as merely convenient excuses made by their ineffective governments. Governments are held responsible for protecting their people from price spikes, but are generally seen as having failed to do so. There is a belief that governments can act to keep prices low if they want to. In Zambia, for instance, some people credited the imminent elections with putting political pressure on the government to keep staple prices low.

Poor people’s explanations of why governments have generally failed to act on food price rises revolve around two key perceptions: that governments do not care about poor people’s concerns; and that corruption at different levels of the system ensures that prices cannot be controlled – either because market inspectors can be bought off, national politicians owe big businessmen favours for help with election expenses, or cartels are permitted to operate.

Young urban men appear particularly angry about governments’ failure to act. According to one group in Kenya, ‘It is high time Kenya went the way of Egypt way. We need a leadership change!’

With revolutions in the Middle East and other protests against governments in Europe, the stress and discontent fuelled by high food prices merits close attention by the G20 agriculture ministers. Hope they’re listening. 

With three years of visits under the researchers’ belts, we’re keen to keep going back to the communities in the next few years, maybe adding on a few other countries and introducing some quantitative methods to complement the qualitative. I’d be interested in links and references to similar research efforts at this kind of  qualitative longitudinal work on particular issues.

Food prices: what’s happening in local currencies and how are governments responding?

Most of the discussion around the renewed food price spike is conducted in terms of world prices, dollar denominated. But people buy food in local currencies, which may or may not follow the dollar trend. UNICEF has a helpful new (30 page) paper out which looks at local food prices across 58 developing countries in 2010 and fills in some of the gaps in our knowledge. Here are some highlights:

“Our analysis shows that, on average, local food price indices in developing countries trail the global food price index closely, with a lag time of roughly one month in the current price run-up.”

The graph compares local v global food prices and shows both this lag, and more interestingly, the fact that local prices appear to be stickier – they rose with global prices in the first price spike, but then fell much less, and now are rising less fast as well, at least so far. However, there the good news ends:

“Low-income countries have experienced much larger food price increases than richer, middle-income countries. This trend appears to be consistent over time, becoming magnified during the 2007-08 food crisis and, again, growing pronounced in late 2010. For example, whereas low-income countries were paying an average of 8.3 percent more for foodstuffs in August 2010 compared to middle-income countries, this difference jumped to 12.6 percent as of November 2010.”

The paper examines policy responses to the price spike at both global and national levels using the same three pronged framework: supporting consumers to promote household food security, supporting producers to enhance the food supply and managing/regulating food markets to reduce the volatility of domestic food prices. The global stuff is fairly well known, so I’ll just focus on the national policy responses:

“Supporting consumption: Policy responses included food assistance (e.g. direct food transfers, food stamps/vouchers and school feeding programmes), price subsidies and controls, cash transfers, reduced consumption taxes and food-for-work schemes.

 Boosting agricultural production: This mainly focused on providing subsidies and reducing taxes on grain producers, although some countries also offered other types of incentives to spur agricultural output, such as credit programmes for small farmers.

Managing and regulating food markets: Many developing countries tried to lower domestic food prices by encouraging imports and discouraging exports, most commonly by reducing import tariffs and/or introducing different export restrictions. Building up and releasing strategic food reserves was another frequently employed strategy to stabilize local food prices. A number of governments also intervened in food markets by restricting stockholding by private traders, imposing anti-hoarding measures and restricting futures trading of basic foods.

Out of 98 developing country governments, 75 have supported consumers, 57 have promoted agricultural production and 76 have intervened in food markets. Developing countries in Asia appear the most proactive in terms of supporting consumers and managing/regulating food markets when facing higher food prices, while countries in Sub-Saharan Africa are most inclined to foster agricultural production. Using an income lens, poorer countries are, on average, more reactive to higher food prices across all policy categories when compared to wealthier, upper middle-income countries.

Analysis of specific responses to rising commodity prices suggests that food assistance, production subsidies and lower tariffs are the most commonly adopted policies by developing countries… A large proportion of developing countries in our sample have also focused on stocking strategic food reserves in order to stabilize domestic market prices (43 percent).”

See the bar chart for the breakdown.

The paper goes into more detail on such responses, finding that low income countries opted for emergency food aid and universal price subsidies, while middle income countries preferred school feeding programmes. Overall, it found that most responses were (understandably) short-term and argues for a longer-term policy framework that acknowledges that price spikes are here to stay. Unsurprisingly (given that it’s UNICEF) it argues for a greater focus on children in the response.

Are food prices becoming more volatile? Yes, says the FAO (but it doesn’t know what to do about it)

The latest in the excellent two pagers from the FAO’s ‘Economic and Social Perspectives’ series looks at price volatility in agricultural markets. It finds that over recent decades, staple food prices have indeed become more volatile. The graph shows a measure of volatility – the market’s expectation of how much the price of a commodity might move in future. The two pager doesn’t say where the data comes from (and the paper on which it is based isn’t out yet), but it seems to measure subjective expectations, a bit like business confidence indices.

As the paper points out, a bit of price volatility is a good thing – it’s part of ensuring that supply shifts in response to changing demand, but excessive, or excessively short-term price swings deters farmers or companies from investing – especially given the timelag between investing in a new crop, and harvesting it.

Why has volatility increased?

“Increased vulnerability is being triggered by an apparent increase in extreme weather events and a dependence on new exporting zones, where harvest outcomes are prone to weather vagaries; a greater reliance on international trade to meet food needs at the expense of stock holding; a growing demand for food commodities from other sectors, especially energy; and a faster transmission of macroeconomic factors onto commodity markets, including exchange rate volatility and monetary policy shifts, such as changing interest rate regimes.

What is more, financial firms are progressively investing in commodity derivatives as a portfolio hedge since returns in the commodity sector seem uncorrelated with returns to other assets. While this ‘financialisation of commodities’ is generally not viewed as the source of price turbulence, evidence suggests that trading in futures markets may have amplified volatility in the short term.”

Alas the ‘so what’ section of the paper does not live up to the diagnosis, merely calling for better coherence and coordination between different institutions (governments, multilaterals etc), transparency and monitoring, safety nets and faster disbursing funding during price shocks – an even more restricted menu than Robert Zoellick’s recent FT piece. The FAO seems to be accepting growing volatility as inevitable and merely trying to cushion the impact a bit.