Food Prices: Is speculation behind the rise in food prices?

The debate about food commodity speculation began when prices for staple foods rocketed in 2007. Maize prices in Ethiopia rose by almost 200 percent between June 2007 and June 2008, while the price of wheat shot up by almost 300 percent in Somalia and 90 percent in Sudan. This hyperinflation of the prices of basic foodstuffs prompted demonstrations in countries around the world.

Any attempt to get to the bottom of the problem inevitably leads to discussion about food speculation.

Non-governmental organizations like Foodwatch, Oxfam, or Weed (World Economy, Ecology and Development) say financial players bear a large part of the blame for the food crisis, and that banks and hedge funds are investing large sums of money in foodstuffs with the intention of making big profits.
"Investment funds are constantly influencing prices on the international market. In recent years, they've increased in volume by around 100 billion US dollars," explains David Hachfeld, a special advisor on trade policy with Oxfam in Germany. In this way, he says, they influence the price of foodstuffs and are able to drive them up.

Some organizations do not agree ith the NGO's. Financial speculation on the futures market alone cannot be held responsible for the rise in prices in agricultural commodities. There were, they say, other key contributing factors.

"People nowadays eat better than they used to. In particular, they can also afford to eat meat. That results in a big increase in the demand for agricultural goods," explains Ingo Pies. This, he says, is a structural factor which has been clearly observable over the past ten years and will continue to affect the markets in future.

Other institutions, such as the Organization for Economic Co-operation and Development (OECD) support this thesis, at least in part. On one hand, they acknowledge that there has been a sharp increase in speculation with arable land since the financial crisis of 2008. However, they do not believe that financial speculation is the cause of the rise in prices.

"This kind of financial speculation, the kind we are seeing now, may to some extent have an effect on price fluctuations, but it doesn't explain the long-term rise in prices," says Carmel Cahill, senior counselor in the OECD's Trade and Agriculture Directorate.

The debate is growing more heated, while food prices continue to rise around the world. According to the OECD, the price of basic foodstuffs such as corn, rice and wheat will keep on going up because populations are growing. In many West African countries, wheat is the product that is most affected.

One thing is clear: a solution must be found. The big question is where to start. The NGOs want to get banks and other financial players to stop speculating on food commodities. Other institutions believe the solution is to be found in combating urgent problems like climate change and land grabbing.

Early next year, the EU intends to implement new rules for the agricultural markets. On December 18, the Parliamentary Committee on Agriculture and Rural Development discussed recommendations for the Commission. In an interview with Deutsche Welle, Paolo de Castro, the chair of the committee, said: "We certainly need to combat the speculation. But we should not forget that the real cause of instability on the agricultural market is strongly linked to the discrepancy between supply and demand."

Note EU-Digest: given the reputation of the financial markets speculation seems to be the first item on that has to be placed on the agenda to tackle this problem.
 
Read more: Is speculation behind the rise in food prices? | Globalization | DW.DE | 30.12.2012

Worrisome Economic Consequences from the Unrest in Egypt - Suez Canal and the price of oil are the real issues

The Peterson Institute for International Economics recently posed the following question:  "What will the instability in Egypt mean for the Middle East economies, and more generally for the world economy?" Their answer: "It is always difficult to predict such matters with certainty. But on the face of it, the direct costs of even a sharp decline in the Egyptian economy would not amount to much. Egyptian GDP is about $215 billion, a mere decimal point in the world GDP of $58 trillion. While Egypt is certainly a large country in the Middle East, at least in terms of the size of the population of 85 million, its GDP is less than 10 percent of the combined GDP of the Middle East and North African countries. Based on these numbers, one would be hard pressed to make the case that even a complete collapse of the Egyptian economy, which is highly unlikely, would have serious ramifications for the region, let alone the world economy.

The price of oil is the real issue. Many observers believe that a possible shutdown of the Suez Canal would seriously disrupt oil supplies, causing a sharp jump in world oil prices. But only about 2–3 million barrels a day transit through the Suez Canal, a drop in the ocean of global supplies. Total world supply of oil is 88 million barrels a day, so the temporary loss of 2–3 million barrels daily is not particularly worrisome. Besides, the oil coming through the Suez Canal would not really be lost. It would simply need to be rerouted via the Horn of Africa adding a little to the price because of the higher shipping costs. Despite these facts, oil prices have jumped significantly in the last few days, with Brent crude on the ICE Futures Europe Exchange rising from $95 a barrel on January 26 to $103 a barrel on February 3.

Even though the Egyptian turmoil may be a "black swan event", it appears the markets have started to reprice the risk of a disruption, and therefore both spot and futures prices have been moving up. An oil price spike of the kind seen a few years ago, when the oil price hit a record high of $147 a barrel in July 2008 would have very serious consequences for the world-wide economic recovery. (At that time, there were heightened concerns over oil consumption going up in Asia, fears of supply problems in some parts of the world, all of which gave rise to speculation in the markets.) However, the probability of a supply disruption, with significant amounts of oil being taken off the market, seems small in the near term.

Speculation, and particularly momentum trading, can push up prices even though the fundamentals would point otherwise. This is the real danger now. It is doubtful that the fragile world economy could take the hit of such a large spike in oil prices. In that sense, what is happening in Egypt has to be of concern to the world."

It can therefore be expected that if the emphasis of the protests move from Cairo and other cities in Egypt to the Suez Canal, the military will certainly not remain as passive as they have been these past two weeks. Those who remember the past history of Egypt will certainly agree with that prediction.

EU-Digest