The authors said cross-border information sharing could help stabilise global commodity food prices in the long-term by reducing price ‘spikes’ which often lead to stockpiling and food insecurity.
In their report published in ‘Food Policy’, the researcher’s from the University of Bonn attempt to make a distinction between price spikes and volatility, as the primary indicators of food crises.
They cited financial speculation as a trigger for price spikes and fluctuating oil prices as the linchpin to price volatility in the medium-term.
“The effect of oil prices on food price spikes has emerged as significant only in recent years. Financial crisis exerts a strong impact on food price volatility, which confirms the increasing link between financial and commodity markets,” the authors wrote.
The problem is then exacerbated by ‘endogenous’ restrictive trade policies which further contribute to price surges, they said. “Recent developments in many countries to increase national grain stocks to reduce volatility and import dependency lead to increased grain scarcity and thus higher prices in the short run.”
Volatility from futures markets
Researchers identified a correlation between speculation and increased commodity prices, although they noted the effects have levelled off since 2000. The knock-on effects of mounting oil prices on maize, wheat and soybean price spikes have however increased since 2000, they said.
Conversely the effects of financial crises were particularly aggressive, the report said, as witnessed in the 2007-2008 crisis which led to a 38% increase in maize prices. Wheat prices were more robust, however, with an increase of just 3%.
“The effect of the financial crisis index is significant and robust across all specifications, implying that the crisis is more relevant than excessive futures trading in explaining food price volatility,” said the researchers.
“The result clearly shows the insignificance of futures trading on volatility, which is in contrast with the results of the price spikes estimation. This underlines the importance of distinguishing between volatility and spikes in this type of analysis.”
The report suggests a more cohesive international approach involving co-operation between government bodies and national associations to pre-empt market fluctuations and facilitate effective counter-measures.
“While the Agricultural Market Information System (AMIS) initiative of the G20 strives for higher transparency, sufficient contributions from some member states are still lacking. Improving the market information base would help all market actors to form expectations based on fundamentals and to detect shortages early,” they said.
A more focused approach to bio-fuel policies may also alleviate food supply pressures and help stabilise markets, they suggested.
The empirical analysis considered agricultural supply and demand pressures, stock-to-use ratios and the effects of futures market trading.
Researchers used three models to assess the impact of different market pressures. The first was a price ‘spike’ model where monthly food price spikes were estimated against oil prices, supply and demand pressures, stock-to-use ratios and speculative futures trading.
The second volatility model estimated monthly food prices against the same market pressures while the trigger model involved statistical analyses of price spikes and volatility.
Source: Food Policy
‘Drivers and triggers of international food price spikes and volatility’Authors: Getaw Tadesse, Bernadina Algieri, Matthias Kalhuhl, Joachim von Braun