commodity markets and food security · food price –drivers: old and new old fundamentals - supply...

Commodity Markets and Food Security

Joachim von BraunCenter for Development Research (ZEF),

University of Bonn, Germany

“Global Cooperation for Sustainable Growth and Development – Views from G20

Countries” - Conference, New Delhi, ICRIER

Sept. 13-14, 2011

Joachim von Braun, ZEF 2011

Outline

• The state of food markets and cost of volatility

• Explaining food price volatility

• Proposed policy actions for G20


Food price – drivers: old and new

Old Fundamentals

- supply / demand / stocks remain main drivers

- the source of old fundamentals is changing from US to emerging

economies such as China, India, Brazil, etc.

New Fundamentals

- Energy market linkages

- Financial market linkages

- Speculation, in combination with trade policy


Level Change, Volatility, Spikes 2004 - 2011: food price indices (monthly)

0

50

100

150

200

250

300

350

400

2004

M01

2004

M03

2004

M05

2004

M07

2004

M09

2004

M11

2005

M01

2005

M03

2005

M05

2005

M07

2005

M09

2005

M11

2006

M01

2006

M03

2006

M05

2006

M07

2006

M09

2006

M11

2007

M01

2007

M03

2007

M05

2007

M07

2007

M09

2007

M11

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

Beverages

Food

Grains

Fats and oils


Human costs:

Food crises have made child malnutrition worse


Food crisis has triggered riots

Source: von Braun, 2009


Cost components of volatility

1. increased hunger and disease

2. reduction of investment incentives

3. distorted asset markets (land prices and

commodities)

4. fiscal and macro-economic effects

5. growing political insecurity


Outline





Food price volatility drivers?

VOLATILITY OF FOOD PRICE

= f [SUPPLY SHOCKS;

ENERGY PRICE VOLATILITY;

FINANCIAL CRISES]


Volatility and supply shocks (e.g. maize)

010

20

30

40

50

60

70

80

Sup

ply

sh

ock in

mill

ion

s o

f to

n

0.2

.4.6

pri

ce v

ola

tilit

y

1970 1980 1990 2000 2010year

price volatility Supply shock in millions of ton

Fig.6a. Price volatility and supply shock-maize

Volatility is measured as the coefficient of variation of monthly prices

Supply shock is measured as the absolute value of difference between de-trended supply and the actual supply


Volatility and oil price

0.2

.4.6

.8

1970 1980 1990 2000 2010year

maize Wheat

Crude oil

Fig 4. Food and energy prices volatility

The association was positive until 1996,

Remained strongly negative until the food crisis started in late 2006

After the crisis the correlation is not only positive but it becomes stronger.


Volatility and Financial Crises

Source: BCDI index from Reinhart and Rogoff (2009), Wheat prices are interpolated from BLS 2008,

Godo 2001, NBER 2008, OECD 2005, U.S. Census Bureau 2008, and United Nations 1999


Volatility boosted by Speculation in futures markets

•The speculation effect depends on the „nervousness‟ of

the market

• stabilizes when the market is less nervous through

price discovery

• destabilizes when the market become nervous as a

result of changes in fundamentals, policies and

structures

• Unconditional control of speculative transaction

undermines the stabilization effect


Speculation - Evidence of causality in the 2008 spike

-5

-4

-3

-2

-1

0

1

2

3

4

5

Jun

-04

Au

g-0

4

Oc

t-0

4

De

c-0

4

Fe

b-0

5

Ap

r-0

5

Jun

-05

Au

g-0

5

Oc

t-0

5

De

c-0

5

Fe

b-0

6

Ap

r-0

6

Jun

-06

Au

g-0

6

Oc

t-0

6

De

c-0

6

Fe

b-0

7

Ap

r-0

7

Jun

-07

Au

g-0

7

Oc

t-0

7

De

c-0

7

Fe

b-0

8

Ap

r-0

8

Jun

-08

Au

g-0

8

Oc

t-0

8

De

c-0

8

Fe

b-0

9

Ap

r-0

9

Jun

-09

Ind

ex

= F

sta

tis

tic

-

F c

rit

ica

l v

alu

e

Last month of a 30-months period

Evidence of speculation influencing commodity prices(positive numbers on vertical axis shows evidence of influence)

Wheat: Volume/Open Interest

Rice: Volume/Open Interest

Rice: ratio non-commercial long positions

Corn: ratio non-commercial short positions

Soybeans: ratio non-commercial short positions

sample in Robles et al (2009) new sample

Food crisis period


Volatility in global food markets and determinants (wheat, maize)

Pooled

Supply Shock in millions of tons 0.0014

(0.006)

Financial crisis 0.001

(0.06)

Oil price volatility 0.235

(0.00)

Constant -0.004

(0.85)

R-square 0.52

N 46

• The effect of supply shocks, financial crisis and oil price volatility on food price volatility ( P-values )

Elasticities: % increase of food price volatility due to a 1% increase in supply

shocks (0.22), financial crises index (0.6) and oil price volatility (0.32). Source: von Braun, Tadesse, IEA-Paper, 2011.


Outline





Strategic agenda

1. Promote pro-poor agriculture growth with technology

and institutional innovations

2. Expand social protection and child nutrition action

3. Reduce market volatility


What to do about volatility?

1. Keep trade open at times of global and regional food shortage

is a must

2. Regulation of food commodity markets? (only as part of

financial markets)

3. Establish grain reserves policy at global level (emergency

reserve, shared physical reserves, and a virtual reserve)


Required international institutional arrangements

• Unilateral food market actions lead to global collective action

failures

• The agenda is too complex for declarations and for delegation

of selected issues to selected current international agencies

• A new multilateral organization is needed to watch matters

and to guide policy and to engage in curbing food price

volatility : an “international grain reserves bank”.

commodity markets and food security · food price –drivers: old and new old fundamentals - supply...

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