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.

On Al Jazeera’s sofa with David Frost and Carl Lewis

Working for an NGO can be pretty routine sometimes – meetings, papers, teleconferences. And then the press office phones up and asks ‘would you mind going on Al Jazeera to discuss the food price crisis with Sir David Frost and Carl Lewis?’ Hell yeah. For those of you who are too young to remember, Carl Lewis won 9 (that’s nine) Olympic gold medals as a US sprinter and long jumper, sported a memorable flat top, and was probably the coolest man on the planet. David Frost did/was none of those things, but he did crack open Richard Nixon over Watergate.

So it’s off to the Al Jazeera office in a swanky part of London, where I am ushered into the waiting room with the other panellists (or rather sofa-ists, given absence of a table), Sir Gordon Conway, former chief scientific adviser at DFID, and Matt Ridley, the token sceptic. Just before we go on air, the TV in the waiting room flicks across to the food riots on the streets of Cairo, a reminder that the topic is deadly serious, however friendly the studio chat. A spot of make-up and then we’re led to the sofa and David Frost, resplendent in pin stripe suit and startling red socks. Meanwhile Carl Lewis, who still looks gorgeous, though a bit greyer, comes over the satellite feed from Philadelphia.

Recording starts. Frost kicks off by asking if we face a dystopian future of riots, hunger and chaos. Carl is clearly the star turn, and Frost turns to him first – he is now ambassador for the FAO, and is clearly sharp and well briefed. Then to Gordon Conway on the science, and then it’s my turn. ‘So Damian’, begins Sir David. Damn, what do I do? Change my name? No, it’s a pre-record, so I correct him. I don’t think he likes me much after that. Not a good start …… But I recover and make a few points (which hopefully they won’t edit out)

I thought the 25 minute conversation was a bit too amicable to make good TV, but judge for yourself here.

The Upside of High Food Prices

Nice pieces from agricultural economist Steve Wiggins on the ODI and Guardian blogs, which I quote at length, because I think it’s an important correction to the discussion on the current food price spike.

‘In 2008 developing countries, and poor people within them, were hit hard by the price spike in the international cereals market. Once again food prices are moving up, not that far short of the levels seen three years ago, so does this mean another bout of hardship? Not quite: there’s a difference this time.

Why? It is not just cereals prices, nor just food prices, that are rising, but almost all agricultural prices – including those of the main tropical exports: cocoa, coffee and tea; cotton; palm oil; sugar; and rubber. Most low income countries, leaving aside the few with minerals and oil, depend heavily on these for their export earnings. Often, much of the production comes from small farmers. Higher prices mean windfall gains for them, gains that are likely to be spent on local goods and services, with strong multipliers in additional jobs and incomes for others on low incomes.

On the other hand, most of these countries are net importers of cereals and will suffer from higher prices on these items.

So where will the balance between extra costs and windfall gains fall? Let’s consider five countries: Burkina Faso; Ghana; Indonesia; Kenya; and Nicaragua; then see the likely impact through changes in the value of their trade in 10 of the most commonly traded items – maize, rice, wheat; palm oil; tea, coffee, cocoa; sugar; cotton, and rubber.

Look at the data and it is clear that all five countries get a large boost to their export revenues – by around 20% in two cases, by 40% in another two, and by more than 100% in Burkina Faso – the latter thanks to it being so heavily dependent on cotton, the price of which has risen dramatically over the past six months.

None of this will provide much solace to those who are feeling the brunt of price increases. We should focus efforts to ease the consequences of another price spike on those we know are most prone to shocks. By identifying those countries with the highest existing levels of hunger who are also major consumers of cereals and dependent on cereal imports we can pinpoint the areas where need is likely to be greatest. Overseas Development Institute studies show these countries are clustered in West Africa, the Horn of Africa and South Central Asia.

When may prices come down from current levels? Provided that the harvests of 2011 are not hit by bad weather, then prices of cereals should come down substantially by the late summer: from experience in 2008, farmers can be expected to produce large harvests in response to higher prices.”

Net impact of commodity windfall minus higher food import prices is shown here.

Conclusion? An obvious point, but one that often gets lost – we need to consider the net impact of price changes on both producers and consumers and on the economy as a whole (eg are commodity exports properly taxed and the proceeds spent progressively? To what extent do high prices reach small farmers and landless labourers?). Reality is, as researchers and wonks love to stress, complicated.

The food price crisis and the World Bank’s blind spots

World Bank President Robert Zoellick, or at least his press team, responded promptly to last week’s concerns on a new food price spike with a comment piece in the FT. It’s fascinating as much for what is missing as for what is in there.

On the plus side, Zoellick gives due priority to food as ‘the essence of life’ and argues that the G20 needs to show leadership on this (alas, in traditional World Bank style, he completely ignores the UN’s Committee on Food Security (CFS), which leads the international response). He stresses the importance of price stability, and supporting small farmers as both a way to produce local food, and to raise the incomes of poor people.

There are several nice nudges and tweaks – access to information on grain stocks to calm market fears; small regional reserves for fast-disbursing food aid; source food aid from local small farmers to boost agriculture. But the whole piece seems to suffer from a straitjacket of free market ideology (he probably didn’t pick the title ‘Free markets can still feed the world’, but it’s a pretty accurate reflection of the tone of the piece). Whatever the problem, the answer can’t go beyond liberalizing trade and investment, voluntary codes of conduct, access to information, and improved aid and safety nets for those that fall through the cracks.

What do we want? More than tweaks and nudges......

This was captured in one of his proposals: ‘give countries access to fast-disbursing support as an alternative to export bans or price fixing’. Export bans, which he presents as the major problem to be confronted, can indeed damage poor people in food importing countries, and need to be discussed. But ‘price fixing’, if by that he means deliberate government intervention to stabilise prices for consumers and producers, has been an effective tool in countries such as Vietnam to reduce food insecurity and provide incentives for farmers to increase food production. So why lump the two together? As far as I can see, the only thing they have in common is that they both interfere with the purported magic of untrammelled markets.

The suggestions for supporting small farmers by sourcing food aid from them are pretty pitiful too – what about government investment in extension services and infrastructure for small farmers rather than big farm lobbies? Or land reform to ensure secure access to land, credit etc, especially for women, the most excluded farmers of all?

Zoellick concludes that ‘the answer to food price volatility is not to prosecute or block markets, but to use them better’. What’s missing is the bit in between his two extremes – regulating markets so they work to the benefit of all, not just the powerful.

Finally, I assume this piece was looking purely to short term action, because it focuses on short-term measures rather than longer-term reform. He fails to mention the long-term drivers of high food prices, such as climate change, the redirection of land to producing biofuels rather than food, the spate of large scale land grabs by foreign investors in many of the world’s poorest countries, the possible role of commodity investment funds and other financial speculation in exacerbating price volatility, or the distorted way that technologies are developed and implemented, that all too often gives priority to large, rich agriculture and fails to really benefit small farmers. If the food price crisis really erupts this year, as seems increasingly likely, we need to have a much deeper discussion than this of its causes and how to respond.

To be fair, Zoellick was one of the earliest international leaders to sound the alarm on the 2008 food price crisis and made some pretty significant shifts in the Bank’s priorities in response.  This time around, the measure of success should be whether poor people are insulated from shocks, how markets can be re-engineered to deliver a combination of stability and sustainability, and whether poor producers can benefit from the market opportunities of higher agriculture prices.   Instead, if this piece is anything to go by, the Bank seems to have a myopic focus on maintaining the integrity of trade and markets.

World food prices hit record high, so why no riots?

According to the Financial Times, the FAO has just reported that world food prices are now higher than their peak during the ‘food price crisis’ of 2008 (see graph). But the last spike was marked by riots in some 30 countries, global emergency meetings, new initiatives etc. Why is everything so quiet this time around? Some possible explanations

Domestic prices aren’t as badly affected. Some of the spike is due to a weak US currency, (the FAO uses dollars for world food prices on its excellent global tracking site, source of the graph). The FAO site’s national data aren’t up to date, so hard to check this – anyone got independent sources of info?

Consumers have got used to higher prices, so aren’t reacting as violently this time around.

The main rises have been in sugar, meat and oil seeds, not the more politically explosive cereals responsible for most of the riots last time (wheat prices are rising fast, but have not yet reached their 2008 levels, while rice is relatively stable).

Most donors are busily cutting or freezing their aid budgets so any civil servant suggesting a new initiative may not get much of a hearing.

As for causes, the Guardian quotes Julian Jessop, chief international economist at Capital Economics, as saying “the surge in agricultural food prices is largely a consequence of supply shocks, such as droughts in major wheat producing countries. These have been compounded by speculative pressures.”

Update: for more on this (and an identical title, but I was first Alex!) see Alex Evans on Global Dashboard

Global price chaos – is another food crisis on the way?

Today in the FT: “Sugar prices suffered their biggest one-day sell-off in 30 years on Thursday, tumbling by as much as 11 per cent after speculators pulled out from the market in the wake of dizzying gains. The sell-off, which came just hours after the sweetener hit a 30-year high, started after the European Commission granted further export licences for the commodity, a move widely expected among physical sugar traders.

But some hedge funds took Brussels’ decision as a bearish signal and began selling heavily, traders said. The selling quickly escalated into a rout as falling prices triggered a string of automatic sell orders on the way down, they said. “It is a total meltdown, totally unexpected. There is no explanation,” one bullish trader said.”

Yesterday: “As economists and central bankers fret about the risk of Japanese-style deflation in the west, commodity traders are warning of a very different phenomenon: “agflation”. Amid supply shortages and panic buying across the globe, prices for cotton, sugar and wheat have spiralled to multi-year highs this week, pushing up sharply the costs of materials for basic foodstuffs and clothes.”

A look at the FAO’s useful food price tracker (left) shows the picture. Food prices are heading upwards rapidly again, approaching the 2008 peak that saw food riots in some 30 countries, and an outburst of concern over food security that triggered a spate of ‘land grabs’ by rich countries in the developing world. It also drastically pushed up the numbers of the roughly one in seven of the world’s population who go to bed hungry every night, (see graph of numbers of hungry people worldwide). The line falls back a bit to 925 million in 2010, according to the FAO, but given the latest price shifts, is surely about to resume its upward march.

This kind of price chaos can mean big profits if you’re playing the market and guess right, but it’s hard to see an upside for either producers or consumers. Is this really the best way to run the global food system?

For more see the Financial Times’ excellent ‘global food crisis’ site.

So do food price spikes cause riots or not?

I’m a big fan of Chris Blattman’s blog (as the number of ‘hat tips’ – [h/t] – on this one demonstrates), but he lost it a bit in his recent post on food riots. Here’s what he says:

‘Globalization and growth should reduce price spikes in future. More countries are producing crops. Climate shocks in Argentina are not that tied to climate shocks in Russia or China, and so price volatility from supply shocks should be going down. Falling transport costs also mean that more substitutes are available, further reducing price volatility. So things should be getting better over time, not worse, especially if trade allows countries to diversify their diet. Envision a future of diminishing instability.’

This reminds me of the apocryphal French diplomat arguing in a Brussels punch-up ‘I can see it works in practice, but does it work in theory?’ Here’s the practice – you can clearly see food prices pretty smooth up til 2007, then going haywire.

Time to adjust the theory, rather than deny the reality, Chris?

Where I agree with him is that the triggers for food riots, as for most things, are often local rather than global – government policy, bad policing etc. And not just in developing countries – the incompetence of the Seattle police was in my mind largely responsible for the collapse of the WTO ministerial in 1999 – they had plenty of tear gas but no crash barriers (see pic). But it’s the interaction between local and global phenomena that we need to understand better – price rises in 2008 did coincide with a wave of food riots, no doubt all with their local contributory factors too. And to argue that this was mere coincidence isn’t very credible, in my view – A at least partly caused B. So yes, worry about local politics, but worry about the graph too.

[h/t Richard King, both for the graph, and for clicking the wrong button and posting this a day early!]

The State of World Hunger in Graphs

This from the FAO’s ‘State of Food Insecurity in the World 2009′. Click on the graphs.

After decades of improvements, the number of undernourished people (in millions) in the world has been rising rapidly since the mid 1990s.

Even as a proportion of total population, hunger started rising in the middle of the last decade

This is partly because aid to agriculture has been collapsing for decades (% of total aid)

The global crisis of 2008/9 hit Asia particularly hard (percentage increase in malnutrition in 2009)

 And food prices are continuing their rebound (this from the FAO’s World Food Prices Index - the orange line is the latest and shows that food prices are already back to late 2007 levels)

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

According 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 worlds 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.

G8 sees rising hunger as a threat to global stability

A significant new addition to the growing chorus of voices expressing concern on hunger and food prices. The food crisis has not gone away since last year, even if the general economic meltdown has driven it from the headlines. World Bank officials have been warning that plantings may be down this year; the FAO has found that consumer prices in poor countries have got stuck, and are diverging from falling world prices (see here) and now Javier Blas at the Financial Times has got hold of a grim report to the upcoming G8 ministerial meeting on agriculture in Italy from 18-20 April. Here are some excerpts from Javier’s piece:

‘The report, entitled “The global challenge: to reduce food emergency”, warns that global food production needs to double by 2050 to feed a surging population while at the same time dealing with “pronounced climate changes” and higher input costs.

“Without immediate interventions in agriculture and agri-marketing systems, the 2007 crisis will become structural in only a few decades,” the document, drafted by the G8’s Italian presidency and seen by the Financial Times, warns. It adds that a further food crisis will have “serious consequences not merely on business relations but equally on social and international relations, which in turn will impact directly on the security and stability of world politics”.

A combination of lower growth, rising unemployment and falling remittances together with persistently high food prices has pushed the number of chronically hungry above 1bn for the first time. Although agriculture commodity prices have fallen since then by up to 50 per cent, they continue well above their pre-crisis level. “The issue of price volatility remains a crucial element for world food security,” the report says. “There is a need for a fast increase of agricultural production in developing countries.”

In the US, the world’s largest exporter of agricultural commodities, farmers are set to break with five years of cropland expansion, cutting their acreage by 7m, the largest fall in 20 years. Elsewhere, the concern is that cash-strapped farmers, particularly in breadbasket countries such as Ukraine, Argentina and Brazil, will reduce their use of high-yield hybrid seeds and fertilisers, hurting output.
The main nightmare scenario among food aid and agriculture officials – and the food industry – is that an unexpected spate of bad weather harms the next crop. With agriculture commodities stocks at multiyear lows, that could push prices up, triggering another crisis on top of the economic one.’