07 February 2012

Speculating about Speculation

Yesterday the Future Agricultures Consortium, which IDS co-chairs with ODI and which is supported by DFID, held a meeting on Food Price Volatility. The core questions revolved around the state of knowledge around: (a) is FPV going up or down? (b) if going up, is it a problem and for who? (c) what, if anything, should be done? and (d) what more do we need to know?

We were joined by colleagues from several organisations including the UK's Treasury, Oxfam, UNCTAD, IFPRI, WDM and SOAS.

The meeting helpfully unpacked a lot of the questions.

  1. Food price spikes -- are we talking about food price levels or volatility? They tend to go hand in hand, but they have two different effects.
  2. Which components of volatility do we care most about? Predictable or unpredictable components? The latter.
  3. Is FPV going up or down? We had papers that said it had never been higher, and some that said it was lower than in the 1970s. Not much consensus there. I suspect the answer depends on the commodity and time period (e.g. for coffee, not much price volatility, for wheat, a lot). Also, the periodicity of the price volatility matters a great deal.
  4. Does FPV matter? At the macro level if the effects are big enough it could lead to a tightening of interest rates. At the micro level consumers are affected--they may be able to offset by switching consumption into foods that have not seen such big price rises, but these are not without costs (whether nutritional or taste) and the adjustments tend to fall more on women (based on work from elsewhere). On the producer side, farmer decisions in one year tend to be highly affected by decisions the previous year (adaptive expectations) and so they can easily over or underinvest in inputs with disastrous consequences. For farmers, FPV muffles the underlying market signals and this is not good. Who does FPV benefit? No-one really with the exception of Commodity Exchanges whose revenues are based on volume.
  5. What are the drivers of FPV? Two classes were identified: fundamental and amplifiers. On the fundamental side we have things like price inelastic demand (a result of economic growth--wealthier consumers are not price sensitive to the foods they like) and on the supply side we have climate uncertainties. But we also have policy choices that for example cast a blind eye to the concentration of exporting surplus in the hands of a few countries and which allow physical food stocks to dwindle. On the amplifier side we have hedgers and speculators. Hedging can be against natural phenomena or market phenomena as can speculation. There was no consensus as to whether hedgers or speculators played any role in amplification. Certainly the speculators in the market provide a direct connection to the need for more hedging and the potential for ramping up of fundamental volatility. But the group also noted the potential of these speculators to be scapegoats when prices are high.
  6. What to do? Lots of options were discussed. There are cause specific solutions--if you think the FPV is being driven by market speculators then limit their positions. There were also general solutions (wherever the FPV comes from) such as reducing information asymmetries through greater transparency, building up stocks--physical or virtual, taxing the rate of volatility, developing risk management products, diversifying production to minimise the impact of local weather shocks. Others suggested region and commodity specific strategies (e.g. agreements in Asia about rice). We did not talk enough about the capacity to formulate, implement and enforce these policies nor the political economy of them.
  7. What additional evidence do we need? Many of the discussants said that the choices above were empirical questions. I felt that everyone had their own favourite evidence base that backed up their assertions but that there was no consensus evidence base--so this would be a priority for me. Other areas of interest to me--experimental economic approaches to appetite for volatility (perhaps we are overestimating the negative impacts?), research on how depleted women become if they act as shock absorbers for the rest of their family in the face of shocks, the impacts of biofuel mandates on FPV, and the contribution to FPV of large scale land and water acquisition deals.
All in all, I felt that once you begin to unpack the issues, there is no easy quick fix (no surprise), there is a clear need for more evidence in this area and there is a need for a consensus set of evidence.

For more information see www.future-agricultures.org (where you will be able to find the power points) and contact my IDS colleagues Stephen Spratt and Jim Sumberg.
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Amy Horton, World Development Movement said...

Thanks for the summary, Lawrence. Disappointing though to hear that "There was no consensus as to whether hedgers or speculators played any role in amplification" of food price changes. Last year's Food Outlook by the OECD and FAO said that "Almost all researchers agree that non-commercial [i.e. speculative] participation in futures markets may amplify price movements in the short term". But there are plenty of vested, financial interests seeking to suggest that there's still too much doubt to justify regulation.

Lawrence Haddad said...

Thanks Amy, I think the key weasel word in the Outlook quote is "may". I think we were struggling to identify the conditions under which that was more likely to be the case.... best