Global Experts Meet to Discuss Food Prices, Price Volatility

Cross-posted from University of Bonn's Center for Development Research

Summary of the international expert consultation organized by the Center for Development Research (ZEF) and International Food Policy Research Institute (IFPRI) held at ZEF in Bonn, Germany on January 31 and February 1, 2013.

By Joachim von Braun (ZEF) and Maximo Torero (IFPRI)

The international workshop on “food price volatility and food security” brought together leading international researchers and policy advisors as well as junior researchers that do innovative research work on the much debated volatility and speculation issues in food markets (see workshop program). The two institutes, ZEF and IFPRI, collaborate in research programs on these issues and their work in progress as well as that by other experts was presented. The workshop and some of the related research is supported by funding from the German Federal Ministry for Economic Cooperation and Development (BMZ).

At the outset, the workshop organizers noted that the movements of food prices have become increasingly difficult to explain and predict; volatility in food prices is a global concern; the impacts of these price developments on developing countries and especially on poor and hungry people need special attention. The different price movements, i.e. extreme price spikes, the more usual volatilities in food markets, and trends need to be distinguished, as they have different causes and effects (see ZEF Discussion Paper 161 and http://www.ifpri.org/sites/default/files/publications/oc72a.pdf

The workshop focused on the following four major interrelated issues:
1) Global overview of price volatility, market structure and food security
2) Financialization, speculation and market linkages
3) Storage, trade, and price stabilization
4) Market integration of developing countries in global commodity markets,
5) Impacts of price volatility on poor peoples’ food and nutrition security and on production.

The level of price volatility can be understood as a result of the stress in the world food system, i.e. demand exceeding supply, and other factors such as high level of concentration in the supply of exports to the world for the basic staples, and financialization of agricultural commodity markets. Bioenergy was a strong new force on the agricultural demand side and did play a role in the creation of food system stress in the past years. The workshop noted that volatility of food prices had been particularly high in recent years, especially since 2007, but it was also found that the volatility had decreased from these heightened levels since 2010.

New methodology on extreme value theory and its application was presented for the identification of extreme price changes and periods of excessive volatility (see presentation of Carlos Martins-Filho and http://www.foodsecurityportal.org/policy-analysis-tools/excessive-food-p... ).

Need for better data
David Hallam, Director of the Trade and Markets Division of the World Food Organization (FAO), emphasized research needs to identify ‘excessive’ price spikes and periods of high vulnerability to exogenous shocks. This requires further endeavors in appropriate monitoring of price developments and their determinants as well as tracking impacts on poor peoples’ food security. He also highlighted the need for better data on food security and reported about related progress at FAO.

The workshop participants welcomed the AMIS initiative - an internationally sponsored Agricultural Market Information System initiated by the G20 - which is aimed at reducing volatility by improving information on stocks and other relevant market information (see ZEF Working Paper 92 ). However, it was also noted that the initiative leaves still a lot of room for improvement as many countries are not yet providing comprehensive information to the AMIS data pool. That does not only apply to Russia and China, but also to the EU.

Information
Information is essential for well functioning markets. In that respect the media play an important role for price formation. They do not just report but also exercise influence: Research was presented that found a close association between daily news on price movements and actual price changes of futures contracts (see presentation of Maximo Torero and http://www.foodsecurityportal.org/policy-analysis-tools/food-security-me... ). This illustrates that media may not only be a neutral reporter but also affecting prices through influencing expectations. Several workshop participants noted anecdotally that in their frequent interactions with media they observed that journalists are mainly interested in reporting about possibilities of sensationally raising prices.

Financialization and speculation
Several presentations considered the role of financialization and speculation as one possible cause of exacerbation of price spikes and volatility. Food prices are not any more just determined by so called market fundamentals, i.e. supply, demand and stocks, but as food commodities are now also an asset class for investors, they are linked to other asset classes in the financial markets. Consequently agricultural commodity prices are found to be increasingly linked to fluctuations of these other markets, i.e. financial assets, stock exchange, real estate markets, and others (see presentation of Stephanie Grosche).

By evaluating daily data on issued Commodity Linked Notes, Neil Pearson pointed out that financial market activities of non-informed traders had remarkable short-term price effects (see presentation Neil Pearson). Co-movements are found between financialization and grain and oilseeds markets (see presentation of Christopher Gilbert) and the scope for general equilibrium modeling between commodities and financial investment was pointed out (see presentation of Christian Schlag).

Wheat prices, for example, have been shown to be affected by excessive speculation as well as other macroeconomic and monetary indicators, like bond spreads (see presentation of Bernardina Algieri and her ZEF Discussion paper 166). Many workshop participants agreed that speculation and financialization could have a significant impact on food prices, but they also acknowledged unresolved methodological challenges to identify causalities and to quantify the exact magnitude of financialization and speculation effects. Nevertheless, regulation regimes in the food commodity markets need to take account of this new situation. As volatility was found to move swiftly across major agricultural futures markets, for instance between the US, Europe and China (see presentation of Manuel Hernandez), such regulation should be a matter of global policy coordination.

Grain storage
Grain storage being the traditional instrument to deal with the variability of harvests - receives increasing attention by governments aiming to increase food security and to reduce food import dependency. It was noted that many nations currently increase their stocks and thereby limit trade surpluses which increases global variability. Public storage is, however, not always a cost-effective option compared to other measures like trade or public safety nets. Furthermore, interference of public stocks might crowd out private traders, increasing fiscal costs (see presentations of Christophe Gouel and Shahidur Rashid). Hence, a challenging research question will be how to optimize trade and storage simultaneously. This is difficult as trade policies are often used to exert market power of big producer or consumer countries at the expense of smaller countries.

Joseph Glauber from the US Department of Agriculture emphasized the increasing role of Russia, Kazakhstan and Ukraine in the global wheat market and of Brazil in the soy market. Policies in the US have been changing: the biofuel mandates have been revised and made more flexible alleviating further corn price increases in the last US corn drought in 2012, for example (see presentation of Joseph Glauber).

Transmission of international price changes to developing countries
Research presented at the workshop showed evidence of strong transmission of international price changes to developing countries, but to different degrees (see presentations of Miguel Robles and Nicholas Minot). Such transmission relates to the trade position, national stock levels and national policies of countries (see presentation of Lukas Kornher). As developing countries are more and more integrated into the global market, global price spikes transmit to domestic prices, be they food import or export countries. Still, domestic production and policy disturbances lead to a diverse pattern of the outcomes of the role of international forces as shown for the case of Ethiopia (see presentation of Seid Nuru Ali).

Threat for food security
Sudden global food price increases are a threat for food security of millions of poor people that depend on affordable staples. Even price spikes that prevail only for few months can have already an effect on child health and nutrition. Analyses of cross-country panel data presented at the workshop reveal that the prevalence of chronic and acute child malnutrition increases with food price volatility. (See presentation of Matthias Kalkuhl). Increasing prices, however, may benefit small-scale farmers, in particular, when they have access to markets and are net sellers of the affected commodity (see presentation of Alisher Mirzabaev and Mario Miranda).

In contrast to high prices, price risks discourage farmers to invest into increased production. Empirical results of an innovative intra-annual global acreage response model presented at the workshop suggest that global production responds quickly to price changes; volatility as indicator of price risk, however, tends to reduce production of important staple crops (see presentation of Mekbib Haile). Thus, extreme price volatility has adverse effects for consumption of the poor and disincentives for producers.

Conclusions
The concluding discussions at the workshop stressed the urgent need to improve information and transparency and to enhance the analytical basis for guiding efficient and effective policies for reduction of extreme volatility. Information needs refer to stocks where reliable data is still not available for many countries and not available on an intra-annual base but also to sound measurement systems for food and nutrition security. The world has no appropriate alert system linking price volatility to food and nutrition security. Contributing to an information system to guide policy makers and responsible fund investors toward appropriately reducing the food security risks of the poor is one important element on the current research agenda of ZEF and IFPRI (see figure on framework for a surveillance system linking global price developments, national vulnerability indicators and bottom-up information on food and nutrition security ).

ZEF and IFPRI will continue their cooperation on these issues and the gathered researchers plan to interact in the future.

View videos from the event.