Friday, 10 February 2012

Food price volatility: Debating causes and consequences

By Stephen Spratt

I thought I'd follow up on my colleague Xavier Cirera's post earlier this week, about high food prices versus food price volatility. We both attended Monday's Future Agricultures Consortium (FAC) and IDS hosted workshop on food price volatility and financial markets.

At the workshop, we posed three questions:
  1. Why does volatility matter?
  2. What impact, if any, do financial speculators have?
  3. What, if anything, should be done about this?
The issue provokes heated debate. Some argue that speculators have affected both the level and volatility of prices, with major development consequences. Opponents argue the exact opposite: ‘speculators’ bring liquidity to markets, lower farmers’ hedging costs and reduce volatility, and so have a positive development impact. Our aim was to bring together the warring factions and shine light on this debate, even if just a chink.

Why does volatility matter?

For question one, there was agreement that volatility is important, but cannot be separated from price levels. What really bites is elevated price levels combined with sharp – and unpredictable – spikes. This describes the situation over the past five or six years well. It is also important to distinguish between prices and levels. High prices hurt consumers and benefit farmers, but high volatility hurts everyone except for a small group of financial market actors: hedge funds that trade on market movements and exchanges that benefit from high volume, which often rises in step with volatility.

What impact, if any, do financial speculators have?

For the second question there was no agreement. Many factors may contribute to high prices (e.g. climate change, rising demand from the BRICs, high oil prices or reduced supply due to biofuel mandates) and to high volatility (e.g. unpredictable harvests, exchange rate shifts or low levels of global food stocks). Separating out the impact of any one cause is fiendishly difficult, so most stress a role for all these factors.

Financial speculation is different. Here one group points an accusing finger, while their opponents see speculators as entirely innocent. The space for this disagreement is created by an inability to prove (or disprove) causality, but maintained by ancient disputes about whether markets are inherently stabilising or not.

What, if anything, should be done about this?

For the third question there was a little more agreement. For example, all accepted the need for better information, both on fundamentals (such as levels of stocks) and on financial factors (such as the level of positions). Opinions diverged at this point though, with some calling for constraints on speculation and others that this was unnecessary.

Take a look at this video to hear what Steve Wiggins (Overseas Development Institute), Jörg Mayer (UNCTAD) and Rob Nash (Oxfam) think should be done:

How to move this on? My view – and it is only my view – is that the development costs of food price volatility, particularly when compared with the quite minor implications of limiting financial speculation in global food markets, makes a case for the precautionary principle. This does not imply that speculation should be curtailed in all markets, far from it, but food is different, or at least most people would accept that it is. At the same time, it is dangerous to fixate on ‘speculators’ at the expense of fundamental causes that need to be urgently addressed. While speculators may potentially amplify price swings, they are unlikely to be the original cause. It is important not to lose sight of this.

We clearly need to know more. What types of volatility matter most and to whom? How do the various causal factors affect these forms of volatility? What types of speculation might matter in each case, and under what conditions? How do national policies affect the transmission of global price volatility to the local level? At least one thing is clear: these questions are not going away. Watch this space.

1 comment :

Elise Wach said...

Great post, Steven. Thank you for sharing! Definitely an interesting 'space' to watch...