Tag Archives: feedbacks

Ecological Economics, Regime Shifts

Food security and financial markets

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FAO says that Food price volatility a major threat to food security:

Concluding a day-long special meeting in Rome the experts recognized that unexpected price hikes “are a major threat to food security” and recommended further work to address their root causes.

The recommendations, put forward by the Inter-Governmental Groups (IGGs) on Grains and on Rice, came as FAO issued a report showing that international wheat prices have soared 60-80 percent since July while maize spiked about 40 percent.

The meeting said that “Global cereal supply and demand still appears sufficiently in balance”, adding, “unexpected crop failure in some major exporting countries followed by national policy responses and speculative behaviour rather than global market fundamentals have been the main factors behind the recent escalation of world prices and the prevailing high price volatility.”

Among the root causes of volatility, the meeting identified “Growing linkage with outside markets, in particular the impact of ‘financialization’ on futures markets”. Other causes were listed as insufficient information on crop supply and demand, poor market transparency, unexpected changes triggered by national food security situations, panic buying and hoarding.

The Groups therefore recommended exploring “alternative approaches to mitigating food price volatility” and “new mechanisms to enhance transparency and manage the risks associated with new sources of market volatility”.

In a recent IFPRI discussion paper, Recent Food Prices Movements: A Time Series Analysis, Bryce Cooke and Miguel Robles analyze the food price spike of 2008.  They asses multiple proposed explanations (from biofuels, oil prices, weather, trade barriers, and speculative markets) using econometric time series analysis.  They conclude that financial activity in futures markets and proxies for speculation can best explain crisis.  They write:

Results of our rolling windows Granger causality tests show the following:

(1) In the case of rice prices we find weak evidence that for few 30-month intervals between 2004 and 2007, the U.S. dollar depreciation rate has marginally Granger-caused the growth rate of rice price; and also the growth rate of real world money holdings seems to be more important in explaining the growth rate of rice prices after 2004, but this evidence is not really statistically significant.

(2) When we analyze the price of soybeans we find that, starting in mid-2005 (which implies a 30-month period ending December 2007), the growth rate in the world exports of soybeans shows evidence of Granger causing the growth rate of soybean prices.

(3) In the case of corn we find that starting in the second half of 2004 the growth rate of oil prices shows evidence of Granger causing the growth rate of corn prices, but with a negative relationship.

(4) When analyzing our speculation proxies we observe that the ratio of monthly volume to open interest in futures contracts indicates that for the case of wheat and rice, starting in 2005, it has influence in forecasting price movements.

Also we find that for the case of rice, the ratio of noncommercial long positions to total long (reportable) positions has an effect on prices, starting in 2004. When we analyze the same ratio for short positions we find additional evidence for speculation affecting the growth rate of corn and soybean prices. In the case of corn there are signs of causality between March 2004 and September 2006, and during the 30-month span from May 2005 to November 2007. In the case of soybeans we find weak evidence, in particular for the 30-month period ending February 2008.

Interestingly as the rolling samples include 2008 and 2009 data, picking the decrease of grain prices since mid 2008 and the adverse effects of the global financial crisis, the evidence of speculation activity affecting spot prices vanishes in all cases. This supports the view that during the food crisis agricultural grain markets were operating under a different regime in which speculation activity played a role in spot prices formation. The overall evidence points to the following interpretation: before and after the food crisis speculation activity had no effect on spot prices formation while during the crisis it did. This is not to say that before and after the crisis speculation was not present, it was (probably to a less extent) but didn’t granger cause spot prices.

Overall, we conclude from our time series analysis that when taking the four commodities analyzed here there is evidence that financial activity in futures markets and/or speculation in these markets can help explain the behavior of these prices in recent years. Other explanations are only partially supported for the particular case of one agricultural commodity or not supported at all. We do not claim, however, that these other explanations should be disregarded; all that we can say is that in using the variables considered in this study and the particular time series models herein, we do not find such evidence.

Frederick Kaufman wrote a Harper’s magazine in July 2010 The food bubble:
How Wall Street starved millions and got away with it that reports on finance and the food crisis. The Harper’s version is behind a paywall, but Kaufman was interviewed on Democracy Now.

More academic takes on the food crisis and the possible future of food price volatility are in:

C. Gilbert and C. Morgan’s article Food price volatility in Proc Royal Soc (DOI: 10.1098/rstb.2010.0139 ). They conclude:

We have highlighted the extensive evidence demonstrating interconnection of financial and food commodity markets as the result of speculative activity. Nevertheless, this contention remains controversial and, until the mechanisms are better understood, the policy debate will remain confused.

and

C. Gilbert’s How to Understand High Food Prices in Journal of Agricultural Economics (DOI: 10.1111/j.1477-9552.2010.00248.x) whose abstract states:

Agricultural price booms are better explained by common factors than by market-specific factors such as supply shocks. A capital asset pricing model-type model shows why one should expect this and Granger causality analysis establishes the role of demand growth, monetary expansion and exchange rate movements in explaining price movements over the period since 1971. The demand for grains and oilseeds as biofuel feedstocks has been cited as the main cause of the price rise, but there is little direct evidence for this contention. Instead, index-based investment in agricultural futures markets is seen as the major channel through which macroeconomic and monetary factors generated the 2007–2008 food price rises.

Regime Shifts

Chris Field says rate of climate change faster than estimated

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At the AAAS meetings in Chicago Chris Field gave a presentation that argues that the Pace of Climate Change Exceeds Estimates:

“We are basically looking now at a future climate that’s beyond anything we’ve considered seriously in climate model simulations,” Christopher Field, founding director of the Carnegie Institution’s Department of Global Ecology at Stanford University, said at the annual meeting of the American Association for the Advancement of Science.

Field, a member of the United Nations’ Intergovernmental Panel on Climate Change, said emissions from burning fossil fuels since 2000 have largely outpaced the estimates used in the U.N. panel’s 2007 reports. The higher emissions are largely the result of the increased burning of coal in developing countries, he said.

Unexpectedly large amounts of carbon dioxide are being released into the atmosphere as the result of “feedback loops” that are speeding up natural processes. Prominent among these, evidence indicates, is a cycle in which higher temperatures are beginning to melt the arctic permafrost, which could release hundreds of billions of tons of carbon and methane into the atmosphere, said several scientists on a panel at the meeting.

The permafrost holds 1 trillion tons of carbon, and as much as 10 percent of that could be released this century, Field said. Melting permafrost also releases methane, which is 25 times more potent a greenhouse gas than carbon dioxide.

“It’s a vicious cycle of feedback where warming causes the release of carbon from permafrost, which causes more warming, which causes more release from permafrost,” Field said.

Evidence is also accumulating that terrestrial and marine ecosystems cannot remove as much carbon from the atmosphere as earlier estimates suggested, Field said.

…

While it takes a relatively long time for plants to take carbon out of the atmosphere, that carbon can be released rapidly by wildfires, which contribute about a third as much carbon to the atmosphere as burning fossil fuels, according to a paper Field co-authored.

Fires such as the recent deadly blazes in southern Australia have increased in recent years, and that trend is expected to continue, Field said. Warmer weather, earlier snowmelt, drought and beetle infestations facilitated by warmer climates are all contributing to the rising number of fires linked to climate change. Across large swaths of the United States and Canada, bark beetles have killed many mature trees, making forests more flammable. And tropical rain forests that were not susceptible to forest fires in the past are likely to become drier as temperatures rise, growing more vulnerable.

Preventing deforestation in the tropics is more important than in northern latitudes, the panel agreed, since lush tropical forests sequester more carbon than sparser northern forests. And deforestation in northern areas has benefits, since larger areas end up covered in exposed, heat-reflecting snow.

Many scientists and policymakers are advocating increased incentives for preserving tropical forests, especially in the face of demand for clearing forest to grow biofuel crops such as soy. Promoting biofuels without also creating forest-preservation incentives would be “like weatherizing your house and deliberately keeping your windows open,” said Peter Frumhoff, chief of the Union of Concerned Scientists’ climate program. “It’s just not a smart policy.”