Spring 2011 - Birkbeck College

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FEATURES World agricultural commodities Professor Hélyette Geman considers the challenges and the solutions relating to feeding the world The price of food is once again in the news, with prices rising sharply. Major producing countries are restricting food exports to preserve enough for their own population. Rising food prices again risk causing riots, as happened in 2007–2008. This may be one of the many factors contributing to the instability across North Africa and the Middle East. From 1980 until about 2006, prices of the world’s four most important agricultural food commodities over the last 30 years were relatively stable. Since 2006, we have experienced a double spike, the first one culminating in mid-2008, and the second continuing to the present day. The major factor causing food prices to rise is the growing demand from the developing world. Not only is the population of the developing world rising rapidly, but it is becoming rapidly richer; richer people eat more food, and more exotic food, that requires more land and water to grow than staple foods. Land and water are both limited resources, production is struggling to keep up with demand, and hence prices rise whenever we see scarcity or the threat of scarcity in the market. Some rich countries with little water (e.g., Saudi Arabia) decrease their own water dependence by importing food, a solution described as virtual water. Dilemma One solution to rising agricultural prices is to increase crop yields per acre. This is happening, but this also raises a dilemma, since efficient farms tend to be big, use lots of machinery and less manual labour, 22 hence creating rural unemployment. Another factor raising food commodity prices is caused by the relationships between agriculture and other commodities. The price history of crude oil and copper, which are respectively the most important energy and metal commodities, is remarkably similar to the four key agricultural commodities. This reminds us that the rise in food prices is only part of a wider picture affecting the prices of almost all commodities. Most plant fertilisers consume oil during their production, and oil or another energy source are also required to run machinery, dry or crush grains, and transport food to market. International shipping costs are also rising, caused by the huge growth in demand for raw materials in Asia. Agricultural products must compete with coal and metal ores for space in ships called ‘dry bulk carriers’. These rising costs are naturally passed on by producers in the form of higher food prices. Lastly, the speculation effect should not be ignored, with new investors/speculators becoming aware of the merits of this asset class. This helps to cause increased correlation between the prices of all commodities. Subsidies and buffer inventories A natural question is whether governments should subsidise food prices for their citizens. Subsidies are clearly essential for the poorest, for whom rising food costs would otherwise mean starvation. However, overly widespread subsidies have the undesirable
Bags of grain (Getty Images) “The rise in food prices is only part of a wider picture affecting the prices of almost all commodities” consequence of removing ‘market signals’ from consumers, demand does not fall, and the problem of rising prices is passed along to another country which may not be able itself to afford subsidies. Another proposal, dating back at least to Keynes in the 1930s, is that either individual governments, or even international bodies, should hold large ‘buffer stocks’ of agricultural products to stabilise markets. In agreement with other commodity researchers worldwide, our research on various commodities in the Commodity Finance Centre indicates that buffer stocks do reduce the volatility of prices, in particular tempering the effect of short-term market ‘shocks’ such as a single bad harvest. However, if there is a large mismatch between supply and demand, buffer stocks are rapidly drawn down, until a point where they are no longer able to stabilise the market, possibly resulting in even greater volatility and a price spike. Individual consumers care little about the volatility of food prices; they are more concerned with the level of food prices. Biofuels As an alternative to traditional fossil fuels (oil, coal, gas), biofuels are agricultural products grown for the purpose of fuel, and often because they are CO2 neutral, release CO2 gases when they are burnt. Many agricultural products can be turned into fuel, including wheat, corn, sugarcane, soybeans and palm oil. Farmers and their advocates in the US and EU have been keen to promote legislation mandating that petrol and FEATURES diesel include increasing proportions derived from biofuels. The CO2 abatement benefits are controversial though – in some cases rainforest is cleared or peaty areas drained to grow biofuels, releasing far more CO2 than is saved. Biofuels may also contribute to the upward price of agricultural products, since they compete with food for land and water. The future The world’s population continues to rise, eat more food, and use more oil. Much of the initial rise of commodity prices in the 2004–2008 period can be ascribed to rising consumption in the developing world, combined with a booming world economy at that time. The global recession gave us a temporary respite in commodity prices, but they now seem to be continuing on an upward trajectory. With land and water becoming increasingly limited, we see commodity prices continuing at their present levels or going higher still, with elevated volatility compared to the 1980s and 1990s. Hélyette Geman is a Professor of Finance and Director of the Commodity Finance Centre at <strong>Birkbeck</strong>. She will deliver a lecture, open to all, as part of Business Week, on Thursday 30 June. See www.bbk.ac.uk/bizweek for details. PhD student Will Smith contributed to this article. To read the full text, visit www.bbk.ac.uk/about_us/bbk 23
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