one doesn't need to look too far...
Proven model predicts higher food prices if speculation is not reined in
The New England Complex Systems Institute, that has developed a quantitative model able to very closely predicted the FAO’s food price index, released a new report predicting sharply higher food prices due in part to excessive speculation.
Their model, originally released in September 2011 matched the FAO’s index from 2004 to 2011. Since then it has continued to closely follow the real world numbers.
Unfortunately, the model now predicts, “another speculative bubble starting by the end of 2012 and causing food prices to rise even higher than recent peaks”
While the researchers acknowledge that the drought in the Midwest U.S. will cause prices to rise, their model shows that excessive speculative activity will have an even larger effect. Though some key financial reforms passed in 2010 may finally begin to be implemented in early 2013, that may be too late to avoid the coming price bubble.
“We find that through the mechanism of speculative activity, the drought may trigger the third massive price spike to occur earlier than otherwise expected, beginning immediately, and sooner than could be prevented by the anticipated new regulations. This spike may raise prices well beyond an increase justified by the reduced supply caused by the droughts… [w]hile the drought only causes a limited price shock, the impact on prices is amplified by the speculative activity,” write the authors.
As NECSI president Bar-Yam said, “We are on the verge of another crisis, the third in five years, and likely to be the worst yet, capable of causing new food riots and turmoil on a par with the Arab Spring, alluding to another study by the NECSI showing that the last two food prices bubbles in 2008 and 2011 correlated with similar increases in violent outbreaks and food riots.
Perhaps most frustrating is that the principal causes of the rising prices are bad public policy:
“Each of these causes is due to particular acts of government intervention or deregulation. Thus, while the food supply and prices may be vulnerable to global population increases and environmental change, the existing price increases are due to specific governmental policies. In order to prevent further crises in the food market, we recommended the halting of government support for ethanol conversion and the reversal of commodities market deregulation, which enables unlimited financial speculation.
Heavy capital investment in existing systems and infrastructures, and rising food prices make it difficult to break out into new solutions and alternatives. Nestle CEO Peter Brabeck-Letmathe in an October 2010 statement to shareholders explained that high food prices increase the pressure to improve efficiency, "But when you start only after prices have gone up, you are too late”. In general, as the food chain extends over distances able to span the globe, waste tends to rise. Local food production for local consumption is the solution but existing commercial practices, consumer habits and expectations are major obstacles to change in the absence of government intervention and legislation, which itself is only likely under crisis conditions.
Holiday Greetings: Food prices on the rise
The U.S. Department of Agriculture Economic Research Service forecasts grocery prices will increase 3 percent to 4 percent next year, with beef and veal leading the way. The information was last updated Oct. 25.Dermot Hayes, an ISU economist specializing in commodity markets and price analysis, thinks the USDA estimate is low. An additional 1 percent to 2 percent is likely, he said.“I think the USDA is just watching farm costs. They’re not looking at other costs” like packaging, trucking and pay and benefit increases, Hayes said.The USDA predicts increases of 4 percent to 5 percent in beef and veal, 2.5 percent to 3.5 percent for pork, 2.5 percent to 3.5 percent in fresh fruit and 3 percent to 4 percent for cereal and bakery products, among other things.Grain supply and demand is the major driver, officials said. The 2012 corn crop nationwide is pegged at 10.7 billion bushels, down 13 percent from last year. Soybean production is forecast at 2.97 billion bushels, down 4 percent from a year ago.Grain stockpiles have greatly diminished over the years as demand ramped up. Corn ending stocks for the 2012-13 marketing year are estimated at 647 million bushels, down from 1.1 billion bushels two years ago. Soybean stocks are projected at 140 million bushels, down from 215 million bushels in 2010-11.As a result, the USDA estimates average corn prices during the current marketing year ending next September will be $6.95 to $8.25 per bushel. The average price in 2010-11 was $5.18. Soybean prices escalated from an average price of $11.30 per bushel during the 2010-11 marketing year to an estimated average of $13.90 to $15.90 this year.Lee Schulz, an ISU Extension livestock economist, said high feed costs will be reflected at the meat counter. Schulz recently spoke at an agriculture outlook seminar at Hawkeye Community College.Farmers nationwide are raising less cattle, hogs and poultry because of a run of red ink, and will for the near future.
Beef on the Rise
While most were busy focusing on turkey last week, cattle prices made a move – jumping from $125 to $128/cwt.Forward cattle contracts for 2013 are averaging $133.50, 8.7 percent above 2012 levels. Both on-feed and off-feed inventories are tight due to two consecutive drought years. 2012 beef cow slaughter is 3.9 percent below a year ago. Total year-to-date beef output is 1.9 percent below 2011, and 2013 production could be down as much as 4 percent. Both steak and ground beef prices have had double-digit percentage increases this year and more of the same is expected in 2013.
Households with least access to market-sourced food are precisely those that must rely on markets to fill their basic food needs. Food markets tend to fail most often and most severely for those who need them the most – the hungry poor.
There is considerable evidence that because poor households spend large shares of their incomes on food and because staples loom large in their food expenditures, lower prices of staple foods significantly increase purchasing power and real incomes. Higher real incomes allow greater purchases of non-staples, leading to substantial short- and long-term nutritional benefits. Conversely, high prices for staple foods lead to reduced consumption of nutritious foods, with long-term negative effects on health, education and productivity.
Most food producers, traders and consumers face a plethora of trade-impeding constraints, which keep many of them in a hunger–poverty trap. Their access to credit is severely limited. The costs of obtaining market information, searching for buyers or sellers, and enforcing contracts are high. Food trade is risky, personalized and cash-based, with limited longterm investment by private traders in transport or storage. Limited and inadequate storage capacity leads to waste and higher pricing.
BIO FUELS AND THE RIGHT TO FOOD
Too much attention has been paid to addressing the mismatch between supply and demand … while comparatively too little attention has been paid both to the imbalances of power in the food systems and to the failure to support the ability of small-scale farmers to feed themselves, their families, and their communities.”
the global community has yet to address the key drivers of recent food prices, which have spiked three times in the last five years. Those include:
- Biofuels, which are still expanding, driving up import costs for developing countries;
- financial speculation on commodities markets, which are still largely unregulated;
- climate change, which continues unchecked with little action on either mitigation or adaptation for developing country producers;
- inadequate public food reserves, which are still widely dismissed as inefficient by global powers;
- insufficient investment in and protection of domestic food producers in developing countries (see my report on Mexican maize farmers), which are still battered by imports and undermined by market failures and misplaced donor priorities.
- Reducing financial speculation on commodities markets – Reforms have been limited, leaving commodities markets prone to wide price swings. Proposals to increase the use of food reserves to limit volatility have been largely rejected.
- Limiting the further expansion of crops and land dedicated to biofuels –Government
subsidies, incentives, and mandates spur biofuel expansion in
industrialized countries, contributing to the underlying demand-growth
that drives agricultural prices steadily upward.
- Expanding sustainable food production in developing countries – Yield gaps are largest among smaller scale farmers, and investing in the sector can close those gaps, improving livelihoods, resource management, and food production.
- Halting “land grabs” – As food-producing resources become more valuable, resource-constrained countries and speculative investors have bought or leased millions of acres of agricultural land in Africa and in other developing regions, compromising the long-term food-producing capacity of developing countries.