Transcript How to Understand High Food Prices

“Food prices: Is there a long term
problem in feeding the world?”
Christopher L. Gilbert
University of Trento, Italy
[email protected]
IDEC Crisis Workshop, 26-27 June 2009, Trento, Italy
The recent background
550
500
Maize
Rice
Sugar
450
400
Palm Oil
Soybeans
Wheat
350
300
250
200
150
100
50
-0
8
8
O
ct
8
l-0
Ju
r-0
Ap
n08
Ja
-0
7
7
O
ct
7
l-0
Ju
r-0
Ap
n07
-0
6
Ja
6
O
ct
l-0
Ju
r-0
Ap
Ja
6
0
n06
(2000 = 100)
Major grain and oil
seed prices rose
sharply in 2007
through to mid-2008.
Palm oil led, followed
by wheat; maize
(corn) lagged. Sugar
remained flat.
Prices fell back, although not to their original levels, in the second
half of 2008, rice less so than other grains. Prices have staged a
recovery in 2009, although not on a dramatic scale.
The wider story
500
Food
Beverages
Agricultural Raw Materials
Metals
Oil
450
400
350
300
250
200
150
100
50
ct
-0
8
8
O
Ju
l-0
r-0
8
Ap
7
08
Ja
n-
7
ct
-0
O
Ju
l-0
07
r-0
7
Ap
6
ct
-0
Ja
n-
6
O
Ju
l-0
r-0
6
Ap
06
0
Ja
n-
(2000 = 100)
Movements in agricultural
prices were less dramatic
than those in either metals
or energy, both of which
also rose earlier than ags.
Agricultural raw materials
(natural rubber excepted)
did not participate in the
boom.
These developments have
provoked concerns that
food prices may be higher
over the longer term.
IMF commodity price indices
Many poor and middle income countries remain net importers of
grains. High food prices impacts negatively on many poor
households, in particular in the cities.
Food prices and the crisis
• The sharp rise in food prices in 2007-08 came at the end of
the long boom and as the financial crisis had already started.
• High food prices were the principal way in which the crisis
impinged on the developing world in 2007-08.
• A number of commentators have suggested that high
commodity prices resulted from excess speculation and were
a bubble phenomenon. A June 2009 U.S. Senate report has
accused speculation of driving up wheat prices in 2008.
Phillips and Wu (2009) have claimed to have identified a
sequence of bubbles rolling across asset markets, starting
with NASDAQ (1999-2000), through U.S. real estate
(subprime bubble) through to oil in 2008. Ags may not have
been immune.
• Differently from this, other commentators have suggested that
food prices may now be high over the medium to long term.
Structure of this talk
1.
2.
3.
4.
5.
6.
7.
8.
The evidence from history.
Agricultural investment
Biofuels demand
Futures markets
Dollar depreciation
What explains the 2006-08 food price spike?
Why are prices rising again?
Conclusions
1. The evidence from history
The historical view
• Prebisch and Singer famously argued that the terms of
trade of primary producers relative to manufactures
declines over the long term.
• If world food supply is becoming more difficult, we should
expect a rising food price trend,
• The historical record is more complicated.
• The choice of deflator is important - export unit values
and developed country CPIs have significant services
content which rises over time.
• I deflate by the US PPI so that the price is then
measured relative to other wholesale products.
Wheat 1842-2008
The recent
rice is prices
is quite small
by historical
standards
600
$/ton (2000 prices)
500
400
300
200
100
US$ prices deflated by US PPI:
02
20
92
19
82
19
72
19
62
19
52
19
42
19
32
19
22
19
12
19
02
19
92
18
82
18
72
18
62
18
52
18
42
0
18
The price trend
was upward until
1900 but since
then has been
downward
Maize, 1860-2008
As in wheat,
the recent rice
is prices is
quite small by
historical
standards
500
$/ton (2000 prices)
400
300
200
100
US$ prices deflated by US PPI:
00
20
90
19
80
19
70
19
60
19
50
19
40
19
30
19
20
19
10
19
00
19
90
18
80
18
70
18
60
0
18
The price trend
was upward until
WW2 but since
then has been
downward
IMF Agricultural Foods Index, 1957-2008
The 2006-08
spike is very
modest
relative to that
of 1973-74
400
350
300
250
200
150
100
50
Deflated by US PPI, 2000 = 100
08
20
05
20
02
20
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
19
72
19
69
19
66
19
63
19
60
19
57
0
19
The price trend
was flat or
slightly positive
until 1973 but
since then has
been
downward. It is
now flat again
What the record shows
•
•
a)
b)
Food price trends have been variable over the past
150 years – periods of rising prices (late C19), flat
prices and falling prices (past three decades). Overall,
the trend has been down relative to producer prices in
general.
Prices have fallen in the context of major increases in
production and consumption. There is no evidence of
demand growth leading to higher prices over the long
term. So either …
agricultural supply is infinitely elastic in the long run, or
productivity growth has offset any tendency to
declining returns.
Will the future be like the past?
•
•
a)
b)
We cannot be sure.
Are there reasons to believe the contrary?
Two factors may be relevant here:
Lack of investment in agriculture over recent decades.
High energy prices (likely to continue for many years)
may result in food crops being diverted into use as
biofuel feedstocks.
2. Agricultural investment
Agriculture and development
• Most poor countries remain predominantly agricultural – in
Sub-Saharan Africa (SSA, not South Africa) 34% of GDP and
64% of employment is agricultural.
• Poverty is concentrated in rural areas - in 2002, three out of
four poor people in developing countries lived in rural areas.
• Substantial reduction of poverty, as foreseen in the Millennium
Development Goals, requires a rural and agricultural focus.
• Agriculture contributed one third of the growth in SSA
between 1993-2005.
• The World Bank estimates that 81% of the worldwide
reduction in rural poverty over 1993-2002 was due to
improved conditions in rural areas (19% to migration).
• Agriculture can therefore deliver poverty reduction and
growth.
Developing countries have been underinvesting in agriculture
14
12
12
11
percent
10
8
6
4
4
2
0
Agriculture-based
12
10
8
6
4
2
0
Transforming
Urbanized
Share of public spending on ag declined
f rom 1990-2005
Agricultural
investment has been
neglected, in agbased developing
countries.
This trend is also
evident in East Asia
Thanks to Luc Christiaensen,
UNU-WIDER
China IndonesiaMalaysiaMyanmar
PhilippinesThailand
Yield improvement is possible
Actual and potential
(on-farm
demonstration) maize
yields in Africa.
6
Ton per hectare
5
4
3
2
1
0
Malaw i
(n=4566)
Ethiopia
(n=310)
Nigeria
(n=2501)
Uganda
(n=461)
Mali (n=163) Mozambique
(n=508)
Average national yield Average yield in farm demonstrations
Thanks to Luc
Christiaensen,
UNU-WIDER
Developing countries and the recession
(Ravallion, 2009)
• Growth in developing countries will slow as the result of the
recession but the poorest countries will generally be least
affected.
• Growth over the past 15 years has moved large numbers of
people put of $2/day poverty – but often only just out. These
people remain vulnerable.
• Slower growth will slow the (net) move out of poverty. Some
households will move back into poverty.
• Impacts will be heterogeneous and will depend on
circumstances. Households dependent on remittances will be
worse off. Mining (deep and artisanal) will generate less. But
some crops (cocoa, coffee, sugar) will generate greater
revenues than in recent years.
Urban-rural terms of trade
• In developing countries, a
rise in food prices shifts the
terms of trade in favour of
rural producers and against
urban consumers.
• In many countries, this
change would correct a
long-standing urban policy
bias and to that extent
should be welcomed.
• In 2008, higher world prices were not fully transmitted to
developing countries because of high freight rates. Costs
rose because of high fertilizer prices. Changes in the
terms of trade were therefore small.
Investment Summary
• In developing countries, the necessary investment can
be forthcoming but it cannot be left entirely to the market.
Government action will be necessary to develop
infrastructure and in extension.
• Land is available for agriculture in developed economies,
e.g. by the elimination of set aside. Again, governments
need to provide the policy framework.
• Larger areas of unexploited or low yield land ia available
in middle income countries such as Russia, Ukraine and
Kazakhstan.
3. Biofuels
Demand and supply
• Movements in prices in 2006-08 were common to a large
number of agricultural commodities.
• Ag economists generally see demand as stable with price
rises resulting from supply shocks. Although there were some
supply problems in 2006 and 2007, harvests were generally
good in 2008.
• Stock levels for many major ags had become low, but this was
not new in 2007 and 2008. Low stocks can explain why a
shock has a large impact (positive or negative) but cannot
explain the origin of the shock.
• Because standard explanations of price change are
unavailable, economists have tended to seize on biofuel
demand to explain the 2006-08 price changes.
Biofuels (Mitchell, 2008)
• Biofuels demand was responsible for the largest part of the rise in food
prices but resists the temptation to quantify this share. Abbot et al
(2008) concurred with this view.
• Maize is the main feedstock crop in the US, oilseeds hold that position
in Europe, Brazil uses sugar cane. Thailand uses cassava while palm
oil has been most important elsewhere in south Asia.
• The global use of maize for feed rose by 1.5% over the four years
2004-07 while its use as a biofuel feedstock grew by 65% over the
same period. 70% of the increase in maize production over this period
has gone into biofuels.
• The expansion in maize production was largely at the expense of
soybeans – the 23% increase in the US area devoted to maize in 2007
was associated with a 16% decline in soybean area.
• The eight largest wheat exporting countries expanded the area devoted
to rapeseed and sunflower by 36% over the period 2001-07 while
wheat area in the same countries fell by 1%.
• Mitchell concludes that biofuels demand drove food prices over 200608
Oil and biofuels: Schmidhuber (2006)
Schmidhuber (2006) argues that
the prices of crude oil and fertilizers
define a break-even price for maize
and palm oil at which of biodiesel
yields zero profit and similarly for
sugar and ethanol.
D
S
p1
p0
Q
if the food demand curve for maize intersects with the supply curve at a
higher price than this threshold p1, it is uneconomic to use maize as a
biofuel feedstock. The maize price is independent of the oil price,
If the intersection is beneath the threshold, at po, maize is used in
biofuels production. The long run demand curve becomes horizontal at
the threshold pulling the maize price is pulled up to this level.
A higher oil price raises the maize price threshold and maize prices
should move in step with oil prices. Maize becomes a petro-commodity.
What do we know?
• The World Bank analysis (Mitchell, 2008) has been very
influential. It has result in enormous pressure being imposed
on U.S. and European governments to cut back on energysecurity driven mandates on biofuel production. The E.U. has
reduced the mandate from 10% to 2%.
• Mitchell does not produce any direct evidence for the claim
that biofuel demand drove up food prices. Instead, the
argument is that there is no other explanation (a residual
argument). Is it the case that no other explanation is
available?
• Schmidhuber’s analysis leads us to expect that there should
be a close link between oil price changes and food prices over
recent years. This provides an indirect check on Mitchell.
• I will argue that Mitchell’s case is overstated and that there is
as yet little evidence that should lead us to restrict biofuels
production.
4. Futures markets
Price formation
• There are active futures markets for many of the most important
agricultural commodities – wheat, maize, soybeans, where prices
rose sharply over 2006-08, and also cocoa, coffee, cotton and
sugar, where there was no boom.
• Active trading allows markets to efficiently incorporate
information about supply and demand fundamentals. If nonfundamentally based trading takes place, futures markets can act
as a distorting lens.
• If prices become too high won’t Warren Buffett sell? If there are
too few experts relative to the amateurs, and if the experts have
short time horizons (for example, because of quarterly reporting),
they will tend to follow the amateurs hoping to get out in time (De
Long et al, 1991).
• Many commentators (Desai, Masters, Phillips, Soros) have
suggested that commodity futures prices were a type of bubble
over 2006-08.
Index investment in futures markets
•
•
•
a)
b)
c)
•
This is a relatively new phenomenon.
Investors have identified commodities as an “asset
class” . They see portfolio diversification advantages in
adding a proportion of commodity futures to equity and
bond portfolios – Gorton and Rouwenhorst (2006).
These position differ from traditional speculative
positions in several respects:
They are almost invariably long.
They are typically rolled forward and turn over slowly.
They track specific indices (e.g. DJ-GSCI) rather than
taking positions on specific markets.
They can be large in relation to the overall market.
Index Fund Values and Shares
U.S. Agricultural Markets
31 Dec 2007
30 June 2008
$bn
Share
$bn
Share
Corn
7.6
25.8%
13.1
27.4%
Soybeans
8.7
26.1%
10.9
20.8%
Soybean oil
2.1
24.8%
2.6
21.7%
Wheat
9.3
38.2%
9.7
41.9%
Cocoa
0.4
11.3%
0.8
14.1%
Coffee
2.2
26.0%
3.1
25.6%
Cotton
2.6
33.0%
2.9
21.5%
Sugar
3.2
29.0%
4.9
31.1%
Feeder cattle
0.4
23.2%
0.6
30.7%
Live cattle
4.5
48.4%
6.5
41.8%
Lean hogs
2.1
43.6%
3.2
40.6%
Total
43.1
26.9%
58.3
27.1%
Since 2006, the CFTC
has published figures
on the offsetting
futures positions taken
by index providers.
These can account for
up to 40% of all
outstanding positions
on these markets.
Elena Corazzella and
I have constructed an
index of these
positions, IF, which we
use in the subsequent
analysis.
Index positions and ag prices move
broadly together
220
0.16
Index futures position
index
Food price index
0.14
200
0.12
180
0.10
160
0.08
140
0.06
120
r = 0.81
100
09
Ja
n-
8
8
-0
8
O
ct
Ju
l-0
r-0
Ap
08
7
Ja
n-
-0
O
ct
7
Ju
l-0
7
r-0
Ap
07
6
Ja
n-
-0
O
ct
6
Ju
l-0
6
Ap
r-0
Ja
n-
06
0.04
5. Dollar depreciation
Exchange rates and prices
• Most ag prices are denominated in terms of the U.S. dollar.
• A decline in the value of the U.S. will rise these prices.
• A simple argument (Ridler and Yandle, 1972) shows that the
elasticity must be less than unity – if not, a uniform
depreciation of the dollar against all countries would raise
prices in all currencies, not just the dollar, upsetting market
balance.
• This result extends to the elasticity for a general set of
exchange rate changes provided the exchange rate index is
appropriately weighted. The weights reflect production and
consumption shares and elasticities.
• In the case that elasticities are equal across countries, the
elasticity is one minus the U.S. dollar share or production
and/or consumption.
• Exchange rate effects on prices are small but consistent over
time. Accurate estimation requires a long sample.
Exchange rates and ag prices move
broadly together
105
220
100
200
95
180
Index of the value of the
dollar
Food price index
90
160
85
140
r = -0.96
6
O
ct
-0
6
Ja
n07
Ap
r-0
7
Ju
l-0
7
O
ct
-0
7
Ja
n08
Ap
r-0
8
Ju
l-0
8
O
ct
-0
8
Ja
n09
Ju
l-0
r-0
6
120
Ap
Ja
n-
06
80
This
correlation
(0.96) is
even higher
than that
with futures
index
positions
(0.81). The
two explanations
compete
with each
other
6. What explains recent food prices?
What explains food price rises?
There are three candidates
1. Dollar deprecation: if the dollar is worth less, dollar
food prices will be higher. Unrestricted estimation gives
an exchange rate elasticity in excess of unity. I impose
an elasticity of 0.53 estimated over data from 19712008.
2. The high oil price: oil and related products (in particular
fertilizers) are inputs into food production. Biofuels
demand will increase consumption.
3. Futures market activity: we have seen bubble-type
activity in other markets, so ag markets may not be
immune.
Cointegration
•
•
•
1.
2.
•
I have 39 monthly observations from 2006/1 to 2009/3. This
forces a parsimonious analysis.
Is there an equilibrium relationship between these three
variables and the IMF’s agricultural food price index in the
Engle-Granger sense that the food price index reverts back
to the level implied for equilibrium.
I investigate this question in two ways:
I use OLS to estimate the long run equation, as the initial
stage of the Engle-Granger two stage procedure.
I use the Johansen procedure to test for the cointegrating
rank in a VAR(2) model linking the levels of the four
variables.
In both cases, I establish the presence of a single
cointegrating relationship. However, the unrestricted EngleGranger procedure gives an exchange rate elasticity in
excess of unity. Imposition of a unit elasticity is acceptable.
Table 6
Estimated cointegrating vectors
Unrestricted estimates
Restricted estimates
Normalization
Engel-Granger
Engel-Granger
with respect to
Johansen
Johansen
Two stage One stage
Two stage One stage
lnIAF or lnIAFX
(1)
(2)
(3)
(4)
(5)
(6)
0.480
0.132
0.070
0.180
0.166
0.116
lnO
(0.072)
(0.036)
(0.080)
(0.033)
(0.035)
(0.054)
0.634
0.176
0.293
0.252
0.271
0.365
lnFIP
(0.128)
(0.069)
(0.120)
(0.061)
(0.061)
(0.097)
- 3.052
- 1.155
- 1.164
- 0.530
- 0.530
- 0.530
lnX
(0.618)
(0.255)
(0.721)
(*)
(*)
(*)
81.0
45.2
Trace test
[0.1%]
[2.3%]
Max eigenvalue
41.4
25.7
test
[0.2%]
[4.8%]
2
R
0.973
0.987
0.968
0.980
DW
1.18
2.03
0.92
2.04
Engle-Granger
- 4.23
- 4.43
ADF(1) test
{- 4.44}
{- 4.09}
Likelihood ratio
11.79
14.68
1.27
2
test 1
[0.1%]
[< 0.1%]
[25.9%]
The cointegrating vectors also include a time trend (estimated coefficient not reported). The trace
and maximum eigenvalue rank tests (Johansen procedure) test the null hypothesis H0 : rank  0
against the alternative hypothesis H1 : rank  0 . R2 statistics (Engle-Granger equations) relate in
all cases to equations in which lnIAF is the dependent variable.
Tail probabilities are given in "[.]" parentheses, standard errors in “(.)” parentheses “(*)” indicates
a restricted coefficient and MacKinnon (1991) critical values in “{.}”.
Sample: Columns 1, 3, 4 and 6: March 2006 – March 2009 (37 observations); Columns 2 and 5:
January 2006 – March 2009 (39 observations).
Analysis of Peak Food Price Change (restricted vectors)
30 month
change
Johansen
Engle-Granger
One step
Two step
Dollar depreciation
lnX
17.5%
9.3%
9.3%
9.3%
Oil price
lnO
71.1%
12.8%
11.8%
11.3%
Futures index positions
lnFIP
51.6%
13.0%
14.0%
24.0%
35.1%
35.0%
41.5%
-
21.4%
21.4%
14.9%
56.4%
56.4%
56.4%
56.4%
Total
Residual
Agricultural food prices
lnIAF
•
The oil price elasticity is almost exactly equal to the 17% passthrough estimated by Baffes (2007). The estimated impact is less
than the 15%-20% estimated by Mitchell (2008). This impact can
be accounted for in terms of upward shift in the supply curve
without recourse to a shift in demand.
•
All three estimates imply some inflation of food prices from futures
market activity.
Getting behind the numbers
•
•
•
1.
2.
3.
•
The preceding analysis identified dollar depreciation, the rising
oil price and futures activity as the proximate causes of the
2006-08 price rises. Where does this leave biofuels demand?
To the extent that food prices were driven by exchange rate
changes, there is no room for a biofuels explanation.
There are three possible channels:
The higher the oil price, the more attractive becomes biofuels
production. Anticipating this, the market bids up the prices of
grains and oil seeds in relation to rises in the price of oil. The
low estimated oil price elasticity makes this unlikely.
Index futures positions may be speculations on future biofuels
demand. This seems implausible
Biofuels may be in the residual (unexplained) component of
the food price change (but how can we know?)
I suspect that biofuels demand is indeed an “intriguing” and
perhaps “significant story relating to particular markets”
(Cooper and Lawrence, 1975) and not a major explanation for
recent food price changes.
7. Why are food prices rising again?
2009
•
•
1.
2.
•
Food prices are rising again in 2009 from post-Lehman
lows. Why?
Two factors are important:
Fertilizer prices are only now falling.
Restocking.
Rice played an important element in this process.
380
The rice story
370
India prohibits rice
exports
350
340
330
-0
ec
-D
ec
18
D
7
7
-0
-0
4-
ov
20
-N
ov
N
7
7
-0
7
The cause of the 2007 rise in the rice price was the
Indian government’s misguided decision to prohibit
rice exports. (India is a major rice exporter).
6-
-O
23
9O
ct
-0
ct
-0
7
7
-0
7
-S
ep
25
-0
7
-0
11
-S
ep
7
-A
ug
-0
28
-A
ug
-0
7
14
ul
-J
31
-J
ul
-0
7
320
17
Rice is the principal
food of many poor
people.
An increase in the rice
price has a negative
impact on poverty
levels worldwide.
$/ton
360
Bangkok rice
export price.
Source:
World Bank
The government’s objective was to protect its population from
the effects of the rising wheat price – but at the expense of the
poor in rice-importing countries.
Trade or stocks?
•
•
1.
2.
•
•
Developing countries, in which food is the major item of
household expenditure, are necessarily concerned with food
security.
Two strategies are available:
Food security stockpiles – financially costly since resources
are tied up in stocks, administratively costly and prone to
corruption.
Trade: less costly and efficient if shocks are uncorrelated
across countries.
Development agencies, particularly the World Bank, have
pushed for trade-based food security. This did not work in
2008, particularly in rice (Haiti, Philippines).
Governments have learnt that they cannot rely on trade –
and hence are rebuilding depleted inventories. This is
pushing up world food prices.
Trade based policy measures adopted
(Joe Dewbre, OECD)
Africa
Asia
Latin America
Overall
33
26
22
81
18
13
12
43
8
13
4
25
14
5
4
23
13
15
7
35
10
6
5
21
12
11
12
35
6
4
5
15
4
2
3
9
4
9
2
15
Cash transfers
6
8
9
23
Increase Disposable Income
4
8
4
16
Countries surveyed
Market Interventions
Trade policy
Reduction of tariffs and customs fees on imports
Restricted or banned export
Domestic market measures
Suspension/reduction of VAT or other taxes
Released stocks at subsidized prices
Administered prices
Production Support
Production Support
Production Safety Nets
Fertilizer and Seed Programs
Market Interventions
Consumer Safety Nets
Fertilizers
700
Prices moved up
sharply in late
2007, lagging
food prices.
600
Phosphate rock
Potash
Urea
500
Phosphates and
urea turned
down in mid2008, too late for
the southern
hemisphere
spring.
400
300
200
100
0
2005
2006
2007
2008
2009
Most fertilizer prices are now reasonable for current northern
hemisphere crops. Potash remains suspiciously high.
The outlook
• Provided harvests are reasonable, I expect food prices to come
down over the coming year – fertilizer prices are falling and
restocking should be over.
• However, the dollar remains fairly low and may go lower, pushing
dollar prices up.
• Low oil prices has resulted in biofuels production has being very
unprofitable in Europe and the U.S.A. over the past nine months.
In the U.S., it has been sustained by the biofuels mandate.
Prospects look better with oil at $70/bl but maize prices remain
above the Schmidhuber threshold.
• My view is that $70 is near the maximum OPEC can hope to
sustain without encouraging production of non-conventional oil.
But if oil does get back towards $100, this may pull food prices
further up.
8. Conclusions
Conclusions (1)
1.
2.
3.
4.
The world can feed itself – but only with the necessary
investment.
Developing countries can increase yields relatively
easily – we do not need a second “green revolution”.
The role of biofuels demand in driving up food prices
has been exaggerated. It is premature to take action to
limit biofuels production.
Dollar deprecation and futures index investment were
more important factors in driving up food prices. They
are highly correlated and it is difficult to disentangle
them.
Conclusions (2)
5.
6.
7.
Attention should be given to the operation of
commodity futures markets and their effects on prices.
It would be extreme to prohibit certain types of actors
or investments but greater transparency is desirable.
Agricultural prices are still high because of high
fertilizer prices and reversion to stock-based food
security. Governments should push for a new WTO
protocol limiting the ability of countries to impose food
export bans or taxes.
My expectation is that food prices will fall over the
coming year.
Thank you for your attention