The spikes in global food prices in 2007-8 served as a wake-up call to the global community on the inadequacies of our global food system.  Commodity prices doubled, the estimated number of hungry people topped one billion, and food riots spread through the developing world. A second price spike in 2010-11, which drove the global food import bill for 2011 to an estimated $1.3 trillion, showed that while global leaders may now be alert to the problems, our agricultural systems remain deeply flawed.

Various inter-governmental institutions responded with alacrity to the food price alarms. But the most powerful governments remain resistant to reform. In the final two months of last year alone, the G20, the WTO, and the Durban Climate Summit all turned big opportunities for action into small communiqués of little import.

In our new report, “Resolving the Food Crisis: Assessing Global Policy Reforms Since 2007,” we find that the recent crisis has been a catalyst for important policy reforms, but governments have yet to address its underlying causes. By avoiding deeper structural reforms, the countries that dominate international agricultural markets leave the world at risk of another devastating food crisis.

The report, released today by Tufts University’s Global Development and Environment Institute and the Institute for Agriculture and Trade Policy, is based on a comprehensive assessment of the policies and actions taken since 2007 by four international groups of actors: the UN, the G20, the World Bank and international donors.

There is a lot to applaud. The price crisis helped reverse a long-running decline in donor support for developing country agriculture. Much of the renewed support acknowledges the important role governments play in redressing the market failures that plague agriculture. Many developing country governments began to rethink the prevailing orthodoxy that they could import rather than invest in growing their own food. Many now emphasize domestic food production and the central role of small-scale farmers and women. We also saw encouraging attention to environmental issues, including climate change, in local and national plans.

But these reforms fall well short of what is needed to meet the world’s current and future food needs in a sustainable way. New international funding is welcome, but only $6.1 billion of the G8’s pledged $22 billion over three years represents new funding. Those pledges may not materialize and are anyway well short of what is needed. They also focus too narrowly on increasing production. This just encourages an expansion in industrial agriculture based on external inputs and ever-more expensive oil.

As the UN Special Rapporteur on the Right to Food said when accepting his second 3-year mandate in 2011, “Too much attention has been paid to addressing the mismatch between supply and demand on the international markets – as if global hunger were the result of physical scarcity at the aggregate level – 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.”

A structural shift in global markets is underway, caused by the deepening integration of agricultural, energy, and financial markets in a resource-constrained world made more vulnerable by climate change. Powerful multinational firms dominate these markets, and they slow, divert, or halt needed policy changes. This leaves international institutions promoting market-friendly reforms but resistant to imposing the regulations required to ensure well-functioning food and agricultural markets.

A paradigm shift in policies is needed as well. Governments need to discourage industrial biofuels expansion, regulate financial speculation, limit irresponsible land investments, encourage the use of buffer stocks to moderate price swings, reduce fossil fuel dependence, promote agro-ecological practices, and reform global trade rules.

Unfortunately, the institutions reviewed have shown little appetite for decisive action. The world’s most economically powerful nations asserted leadership on food security at the G20, then backed away from reform. This has had a chilling effect on reform efforts elsewhere in the international system, most notably at the UN. (See earlier posts on this here.)

Three areas in particular demand decisive action. First, biofuels expansion must be slowed. It is widely recognized as one of the key factors behind rising agricultural commodity prices, driven by government incentives in rich countries. Second, the high levels of price volatility must be addressed. Financial regulations must limit speculation, well beyond the weak measures already enacted. Firewalls need to be put back in place between traders’ risk hedging activities and speculative investment. Food reserves are also needed to cushion price swings. Third, land grabs by resource-constrained nations and speculative investors must be stopped. Such investments compromise the long-term food-producing potential of developing countries and violate the rights of those now on the land.

Fortunately, many developing countries are making changes. New agricultural development programs in Africa focus on small-scale farmers and women using low-input techniques and local resources while building climate adaptation. Bangladesh and other countries used food reserves to reduce the impact of the food price spikes, and food reserves are again on the agenda. As the African Union said in its rebuke to the G20’s June Agricultural Action Plan, “we must rely on our own production to meet our food needs. In fact, importation is not Africa’s goal.”

Read the Executive Summary, the full report, or watch a Real News Network interview with the authors.

Sophia Murphy is a senior advisor at the Institute for Agriculture and Trade Policy and a regular contributor to the Triple Crisis Blog (see previous posts here, here and here)

The WTO ministerial meeting in Geneva last week failed to take any decisions on the question of food security. Indeed, we knew this would be the outcome even before the meeting began. As the ICTSD reported, two proposals on food security – both calling for exemptions from export restrictions for the world’s least developed and net food importing developing countries and for humanitarian food purchases by the World Food Programme – did not gain sufficient support at the WTO General Council meeting in late November to make the Ministerial agenda.

The fact that WTO members could not even support discussion of these specific measures does not bode well for the adoption of a broader and more comprehensive food security agenda at the WTO.  The disagreements over rules on export restrictions have in fact served as a distraction from the broader food security issues that the WTO is already supposed to be working on.

The original Doha Agenda included negotiations on sweeping reforms to the 1994 Agreement on Agriculture, in particular to give special and differential treatment to developing countries, with a view to promoting food security. This was clearly spelled out in the agricultural work program of the Doha Declaration back in 2001 when the trade round was launched. It is worth quoting here to remind us how central it was to the original aims of the Round:

“We agree that special and differential treatment for developing countries shall be an integral part of all elements of the negotiations and shall be embodied in the schedules of concessions and commitments and as appropriate in the rules and disciplines to be negotiated, so as to be operationally effective and to enable developing countries to effectively take account of their development needs, including food security and rural development.”

In the decade since the Doha Round was launched we have seen major upheavals on world food markets, with soaring and highly volatile food prices that have been especially hard on the world’s poorest countries, most of which are highly dependent on food imports. As the FAO noted in its most recent Food Outlook, higher food prices in 2010-2011 increased the food import bill of the world’s least developed countries by over one third from the previous year.

In this context, advocates of trade liberalization have been quick to blame export restrictions as a principal cause of food price spikes and rising hunger. Such restrictions have undoubtedly exacerbated the situation in the short run. But the causes of rising food insecurity run much deeper and have longer term causes that themselves are not unrelated to WTO rules on agricultural trade – the very rules that the Doha Round was supposed to correct.

The developing countries that are dependent on food imports today were net agricultural exporters in the 1960s. Somewhere around the mid-1980s the situation reversed itself and today they rely on trade for around one quarter of their food consumption. What was the cause of this reversal in the agricultural trade balance? Declining agricultural investment was part of it – not just a decline in domestic investment in developing countries but also a dramatic drop international agricultural assistance. Why did this investment drop? In large part because cheap food was available on world markets, thanks to high subsidies in the rich industrialized countries.

This pattern was reinforced by the 1994 Agreement on Agriculture under the Uruguay Round which enabled the rich countries to keep their high subsidies while further prying open markets in poor countries that had already been forced to liberalize their agricultural trade under World Bank-sponsored programs of structural adjustment in the 1980s. As the UN Special Rapporteur on the Right to Food, Olivier De Schutter said in a press statement during the recent WTO Ministerial: “These countries are caught in a vicious cycle. The more they are told to rely on trade, the less they invest in domestic agriculture. And the less they support their own farmers, the more they rely on trade.”

What is really needed is a serious discussion in the WTO on how to reduce the dependence on food imports and rebuild resilient agricultural sectors in the world’s poorest countries. The early years of the Doha Round in fact had serious negotiations on this question. In seeking to protect themselves from surges of cheap imports that harmed the livelihoods of their domestic farmers, developing countries have been calling for robust safeguard mechanisms to be incorporated into the Doha Agreement . They have also been pressing the industrialized countries to reduce their farm subsidies. But the major agricultural exporting countries – the US, Canada and Australia, have fought hard against a strong safeguard mechanism for developing countries, and the subsidy cuts agreed thus far have been only minimal. In fact, this foot dragging on agriculture is a major reason why the negotiations have been stalled since 2008.

Addressing volatility in food prices is certainly important, and adopting specific exemptions from export restrictions is perhaps one way to alleviate the effects of price spikes on the world’s poorest people in the short term. But such measures – even if the WTO members could agree on them – should not distract us from the bigger picture. We must remember that the root causes of food insecurity are themselves not unrelated to the existing highly uneven WTO rules on agricultural trade, and that the original aim of the Doha Round was to level the agricultural playing field. This original WTO food security agenda should be brought back to the forefront of the discussions.

Agricultural Trade Balance of the Least Developed Countries, 1961-2006

Graphic reproduced from Jennifer Clapp, Food (Polity Press, 2012).

ROME, OCTOBER 2011 – Multilateralism is in crisis. It is perhaps most evident in the painful and truly frightening failure of governments to come to grips with the implications of climate change. But it was also evident on a much less well-publicized stage in mid-October in Rome, where governments were gathered at the U.N. Committee on Food Security (CFS) to discuss food price volatility…

Read the full commentary.

As the G20 takes its November meetings into the belly of the eurozone crisis, its food security agenda drifts toward irrelevance. Or worse. Early promises to address commodity speculation and market volatility have given way to tepid recommendations from G20 agricultural ministers in June and last month’s underwhelming communiqué from its Washington meeting on development, with its one snappy paragraph on food security issues. Now that finance ministers on their gilded steeds have turned and fled from the dragons of commodity speculation, the G20 is unlikely to slay any of the monsters threatening global food security – biofuels expansion, land grabs, speculation, price volatility, low public investment.

Fortunately, new research keeps coming, and it should inform the debate. The latest is from a group of researchers at New England Complex Systems Institute (NECSI). As their name would indicate, these are modelers, and their paper, “The Food Crises: A quantitative model of food prices including speculators and ethanol conversion,” offers evidence that the underlying cause of rising food prices over the last decade is primarily the US corn ethanol program, while the cause of the two recent price spikes is speculation.

The model results pretty much speak for themselves. The authors – Lagi, Bar-Yam, Bertrand, and Bar-Yam – sought a model that could explain recent food price movements, and they found one. In the process, they disprove notions that rising prices were caused by weather, rising demand in China and India, and other fundamentals of supply and demand. Minor effects, says their modeling, compared to conversion of US corn to ethanol, which explains the vast majority of food price increases (not just corn) due to fundamentals. They then add to this relatively smooth upward pressure on prices their model of commodity market speculation based on observed trends, herd investing, lags in market corrections, and transmission from futures to spot markets. Notably, they fit their model not to futures price movements but to food prices themselves. Here is their summary graph and explanation:

FIG. 1: Food prices and model simulations – The FAO Food Price Index (blue solid line) [1], the ethanol supply and demand model (blue dashed line), where dominant supply shocks are due to the conversion of corn to ethanol so that price changes are proportional to ethanol production (see Appendix C) and the results of the speculator and ethanol model (red dotted line), that adds speculator trend following and switching among investment markets, including commodities,equities and bonds (see Appendices D and E).

The authors explain the influence of volatile futures markets on spot prices by taking the novel step of talking to granaries about their price-setting practices. According to the authors, traders report setting spot prices using futures prices as references. Ghosh, Heintz and Pollin, in a new paper, explain these connections in more detail: “If the expectation is that prices will increase in the future, suppliers will only be willing to sell on the spot market at a higher price than they would in the absence of such expectations. This is because traders in the physical commodity could always hold onto their stocks and sell them at some point in the future.”

In any case, the NECSI model of speculative behavior fits the actual price data to a remarkable degree. They even explain the more recent run-up in food prices, which, unlike the 2007-8 spike, happened despite a rise in inventories generated by supply responses to the earlier spike. Their explanation: speculation, which kept prices above equilibrium and prevented the poor from buying up those inventories.

Their conclusions are quite clear: “Both causes of price increase, speculative investment and ethanol conversion, are promoted by recent regulatory changes – deregulation of the commodity markets, and policies promoting the conversion of corn to ethanol. Rapid action is needed to reduce the impacts of the price increases on global hunger.”

The underlying model certainly deserves closer scrutiny, but this is no marginal study by fringe researchers with an agenda. It was partly funded by the U.S. Army, which was apparently interested in understanding the causes of food price rises and their relationship to popular unrest in the Middle East and North Africa. The authors list their reviewers: Peter Timmer, Jeffrey Fuhrer, Richard Cooper, and Thomas Schelling.

Hopefully, the G20 is still listening. So too the U.N.’s High Level Task Force on the Global Food Security Crisis, which commissioned its own expert study (see posts here and here). The danger is that the U.N. will allow the G20 to set its agenda, in effect reducing the range of issues and policy responses on the table.

The mounting evidence implicates two key drivers of high prices and volatility, biofuels expansion and speculation.  A new study from IFPRI confirms this, as does UNCTAD’s Trade and Development Report 2011. As the NECSI researchers point out, both biofuels and speculation are influenced directly by regulations. That’s good news, because it’s harder to address some of the other drivers, such as the weather and the move to meat-based diets in emerging economies. By comparison, these are simple (if complex politically) and the U.S. government could go a long way to solving them unilaterally: end ethanol incentives and implement strong Dodd-Frank-mandated regulations on commodity speculation. Throw in a Financial Transactions Tax, which still has some supporters in the G20 and which new research shows would most impact high-frequency traders, and we could be making important progress on food security.

G20 – Are you listening?

An extraordinary new process has been at work in the past few years: the aggressive entry of Indian corporations into the markets for agricultural land in Africa. At one level, this process is simply following the hoary old tradition in global capitalism, of firms (often supported by the governments of the originating countries) entering new areas in search of access to natural resources on preferential terms.

Several centuries ago, the growth of plantation agriculture in large parts of the western hemisphere was essentially the product of such a process. This was further facilitated by cross-border movements of labour (in the extreme case of African labour through slavery, then through indentured labour contracts largely from South Asia, then through supposedly more ”free” movements driven by lack of adequate income opportunities in the home countries). Together these flows generated production and trade patterns that were critical in shaping the international division of labour by the mid-twentieth century.

In more recent cases, multinational agribusiness companies from Europe and the United States have been active for more than a decade now, acquiring prime agricultural land in developing countries to grow cash crops and biofuels that benefited from substantial subsidies provided by developed country governments. But recently, this global land rush has become even more competitive, with companies from developing Asia, and particularly China and India, joining the scramble for acquiring land.
A new research study by Rick Rowden (”India’s role in the new global farmland grab”, GRAIN and ERF) provides some often startling insights into this process, particularly with respect to Indian companies and the explicit and implicit encouragement provided by the Government of India. Most of the Indian companies involved in such land purchase and lease arrangements have thus far been focussed on Africa, but South America is also seen as a promising new destination. And integrated Indian oilseeds firms have already invested in South East Asia, in operations ranging from plantation cultivation to the processing of edible oils for export.

Looking at the East African region alone, based on data provided by governments in the region, Rowden finds that more than 80 Indian companies have already invested about $2.4 billion in buying or leasing huge plantations in countries like Ethiopia, Kenya, Madagascar, Senegal and Mozambique. The land will be used to grow food grains and other cash crops for the global market, and in some cases specifically for the Indian market.

It is not just the allure for Indian foreign investors of much cheaper land and the promise of more abundant water sources in these locations that have driven these investments. It is interesting to note that many governments in the African region have actively courted Indian and other agricultural investors. They have typically offered incentives, ranging from the permission to lease massive tracts of arable land at very generous terms and providing access to water, to promising the firms that they will be allowed to export all output and have the ability to repatriate all profits.

The Indian government, for its part, has both facilitated and encouraged such investment, seeing it as a way out of land availability issues and increasing problems of water shortage facing Indian agriculture. In addition to leading trade missions and supporting various initiatives to facilitate Indian agricultural companies in their overseas investments in Africa and elsewhere, it has progressively liberalised the rules on outward FDI by India companies. The Eximbank has provided lines of credit and soft loans not only to African governments, but also to Indian companies engaged in such transactions.

Ironically, many of these Indian companies operating in Africa are engaging in activities that involve huge displacement of farmers and changing patterns of production and consumption that would either be difficult or impossible for them to do in India. They would either be illegal or get embroiled in very significant political controversies because of the negative impact on local people.

Take, for instance, one of the most high profile of recent deals, the acquisition of around 300,000 hectares of land on long lease in the Gambela region of Ethiopia by the Indian firm Karuturi Global Ltd. The claim is that this was all surplus, or unutilized land that will now be used for more efficient and productive cultivation. But this is fiercely contested by several local analysts, who point out that there is no such thing as ”idle land” in Ethiopia, or indeed anywhere else in Africa.

It is well known that competition for grazing land and access to water bodies are the two most important sources of conflict between different pastoral communities in Ethiopia, and in all such cases of land lease involving foreign enterprises, there have been complaints by locals of loss of access to grazing land and water. There have been many cases of loss of cultivated land as well as homestead land in the process, leading to simmering discontent that has not yet been able to find political voice.

Further, since the new cultivation practices will be highly mechanized, there will necessarily be quite substantial displacement of labour from the traditional smaller-sized farms that will have lost land. And cultivation of the traditional staple food crop teff has already been affected, leading to significant increases in local prices of this basic food crop which forms part of the subsistence diet of most Ethiopians. Meanwhile, there are also growing environmental concerns about the pattern of cultivation that has been promoted through these new arrangements. The large scale and heavily mechanised monocropping farms that are being created typically depend upon high levels of water usage and involve heavy doses of pesticides and herbicides that can pollute nearby groundwater, all of which can rapidly deplete soil quality.

What is even worse is that the contracts signed provide a high degree of protection for the companies with low responsibility for any adverse effects, and scant respect for the rights of those affected by the contracts. Rowden’s study provides detailed analysis of several contracts, including that of Karuturi Global Ltd. with the government of Ethiopia.

According to Karuturi’s signed lease agreement for the first 100,000 hectares, it has been given the land for 50 years at a cost of total cost of only 100,000,000 birr (equivalent to $59.28 per hectare) for full use of prime agricultural land, with yearly rent of only $1.18 per hectare! The five contracts analysed all mention that that the companies have the right to build dams, water boreholes and irrigation systems as they see fit. But there is no mention of paying for this water, how much water would used or over what period of time, how the usage would be monitored, or what the environmental impacts would be on surrounding areas regarding the water that would diverted for use by the companies. With fixed term leases, the implications for over-exploitation of this critical resource are obvious.

As a sign of how attractive the Ethiopian government is seeking to make such investments, the contracts all provide for ”Special investment privileges such as exemptions from taxation and import duties on capital goods and repatriation of capital and profits granted under the investment laws of Ethiopia.” None of these five contracts for the Indian companies mention labour laws or specify any wages or working conditions for their local employees. There is no obligation to dedicate any portion of the produced crops to the domestic market for local consumption.

In all the contracts analysed, the Indian companies have the ”right” to provide power health clinics, schools, etc., but these are not listed under ”obligations” of the investors. Nor do the contracts specify for whom these services might be provided – the local population or for those of company workers. Since this is merely a non-enforceable right, the companies may choose to not act on it.

One of the most disturbing features of the contracts relates to the displacement, the very aspect that is currently the cause of so many intense disputes in India. Rowden points out that ”the contract for Karuturi suggests the Government of Ethiopia will evict any local people who are in the way of the commercial project, by force if necessary. Although this land has been or still is home to thousands of Ethiopian citizens, Article 6.1 of the contract states: ”The lessor [Government of Ethiopia] shall be obliged to deliver and hand over the vacant possession of leased land free of impediments.” Arguably local people who are unwilling to leave their land could be construed as ”impediments” and the lessor is now contractually obligated to ensure they are not a problem for the company. Article 6.6 seems to suggest the Government will provide police or military action against any resistance: ”The lessor [Government] shall ensure during the period of lease, the lessee [Karuturi] shall enjoy peaceful and trouble free possession of the premises and it shall be provided adequate security, free of cost, for carrying out its entire activities in the said premises, against any riot, disturbance or any other turbulent time other than force majeure, as and when requested by the Lessee.”

All these features point to a frightening new tendency with respect to land acquisition by Indian companies. As democratic processes in India force both Indian corporations and the Government to take into account the rights of local citizens, issues of compensation and rehabilitation of those displaced, environmental concerns, the conditions of workers, and other related aspects, there is an attempt to export the problem by encouraging these companies to undertake land grabs elsewhere in the developing world.

Surely all those who would fight such irresponsible and exploitative corporate behaviour in India must raise their voices against this tendency as well. At the very least, we have to express solidarity with those like Obang Metho, Director of the Solidarity Movement for a New Ethiopia (SMNE), who in an ”Open Letter to the People of India” asked for the citizens of India to take steps to stop the harmful land grabbing by Indian companies in Ethiopia:

”I come to you first and foremost as a fellow human as I call you to join our effort to stop the plundering of Ethiopia and Africa by African dictators, their cronies and their foreign partners-some of whom are Indian-who are hungry for our resources but care little for our people. …Will you help work within India to bring greater transparency and compliance with whatever protective laws and safeguards are in place in India?”

This is important for Indian democracy not only because of the broader humanist considerations outlined by Metho, but also because without this solidarity, the struggle for greater economic justice within India will also be undermined.

This article was originally published in Frontline, Vol. 28: No. 19 Sep 10 – 23, 2011, and was re-posted from the IDEAs Network.

International assistance for food and agriculture has seen a dramatic drop since the late 1980s, with the share of agriculture in ODA and funding for food aid both falling. The food price rises and climbing rates of global hunger that occurred as a result of the 2007-08 food price rises have not yet led to a significant reversal of these trends. The lacklustre global commitment to food and agriculture is disconcerting in a context where food prices have remained high and famine is currently gripping parts of the Horn of Africa.

Agriculture used to have a prominent role in development assistance programs. But according to the OECD, the share of agriculture in official development assistance (ODA) fell from approximately 17 percent in the late 1980s to around 6 percent today, which is up from below 4 percent in 2003.

Recognizing that this level of support for agriculture was unacceptable, the G8 countries and others pledged at the L’Aquila summit in 2009 to mobilize US$20 billion over a three year period for investments in sustainable agricultural development as part of the L’Aquila Food Security Initiative (AFSI). This funding pledge was reiterated by the G20 at Pittsburgh later that year. The G8 and G20 both endorsed the World Bank managed multilateral fund, the Global Agriculture and Food Security Program (GAFSP), as a key channel for these funds. It should be noted that not all of this US$20 billion is new funds over what these donors had already pledged.

Have donors lived up to their commitment for increased agricultural assistance? Two full years later, only US$ 925.2 million has actually been pledged to the GAFSP, and only just over half of that amount was actually received.  And only some US$345 million in project funding decisions have actually been made through this funding window.

The 2011 G8 Deauville Accountability Report notes that in fact only 22 percent of the amount pledged for the AFSI has already been disbursed, indicating that much of the funding is not being channelled through the GAFSP, but rather is being channelled bilaterally. The report also notes that the scope, components and time periods of the pledges are different for each donor, making the process of tracking progress on this pledge “challenging.” According to the report, an additional 26 percent of the funds are on track to be disbursed; donors are expected to disburse all of the pledged funds by 2012. The current financial crisis may change priorities, but we won’t know until the end of 2012 how donors fared on this front.

The other area key area where support is needed is emergency food aid. The World Food Programme (WFP), which relies on voluntary contributions for its budget, has faced a serious challenge raising the funds it needs to address emergency crises such as the current famine in the Horn of Africa. Indeed, it has struggled to raise funds to meet its annual budget in recent years, with 2009 being an especially difficult one. Donors, in other words, have held their purse-strings tight, forcing the WFP to pass around the hat in times of crisis and in some cases to cut rations.

At the same time, it is unclear whether donors will agree to a collective commitment as part of the current Food Aid Convention renegotiations. If the FAC donors fail to agree to a combined annual food aid commitment under this agreement, the WFP will be left in an even more uncertain funding situation because a large share of its food aid funding comes from these donors. By the end of July this year, the WFP had received just over US$2 billion in funding from donors out of a projected US$6 billion budget. This precarious situation strengthens the argument for a portion of the WFP’s funding to be guaranteed through the UN. World Bank President Robert Zoellick called for such a change in WFP funding in 2008. No action has been yet taken in this direction, leaving the WFP still at the whim of donors’ changing aid budgets.

The global community could do more to live up to its pledges to provide assistance for agriculture and food security, especially in these times of heightened food prices and growing global food emergencies. Assistance to build resilient agricultural systems in developing countries is required if those countries are to better prepare themselves to bounce back from shocks without needing to rely on food aid. But to hold back funds for food aid before the broader agricultural assistance is provided leaves those countries even more vulnerable. Agricultural assistance and food aid must be carefully coordinated.

The decline in agricultural investment and increased reliance on food aid in poor countries took place over a period of some 40 years. It occurred in a context of rich country agricultural subsidies, market distorting food aid practices (especially non-emergency aid) and unbalanced trade, all of which reduced incentives for local production in developing countries. The situation won’t be reversed overnight. It will require increased, coordinated and sustained assistance.

Triple Crisis bloggers on Greek Crisis:

Another Victory for Finance? By CP Chandrasekhar
Restructuring Greece’s Debt Crisis, by Kevin P. Gallagher
The Greek Crisis: The EU’s Wasted Year, by Daniela Schwarzer
The Greek Crisis: Uttering the Other “D Word,” by Matías Vernengo
The Tyranny of Bond Holders, interview with Kevin P. Gallagher

Triple Crisis bloggers on commodity speculation and food prices:

Spotlight G20: Identifying the Drivers of Price Volatility, by Timothy A. Wise
Speculation Drove Wheat Prices up While Supply Expanded, interview with Jayati Ghosh
Spotlight G20: New Evidence of Speculation in financialized commodities markets, by Timothy A Wise
Spotlight G20: Agriculture Ministers Should Strengthen Government Role in Volatile Markets, by guest blogger Sophia Murphy

Triple Crisis bloggers on the US Debt Ceiling Debacle

The Debt-Ceiling: a Guide for the Bewildered, by Matías Vernengo
GOP bad faith on the debt ceiling, by Kevin P. Gallagher
US debt impasse worries the world, by Martin Khor

Sophia Murphy and her colleagues have produced an excellent report as part of the Commission on Food Security’s coordinated effort to respond to recent food price increases. The report, “Price Volatility and Food Security,” is one of several from the so-called High Level Panel of Experts (HLPE) to help inform the CFS’s fall meetings on the crisis. As Sophia points out in a recent post on the IATP blog, their report offers a strong challenge to the G20, which recently convened its agriculture ministers for a lackluster effort to take strong action to address volatility and food security. (See recent posts in our Spotlight G20 series.)

Among the intriguing findings in the HLPE report is the analysis of the evolution of demand for agricultural products and the dominant role that biofuels is playing in that demand.  The authors rightly point out that while there remains some debate about the role of financial speculation in driving up food prices, there is near-consensus that biofuel policies, primarily in the United States and the European Union, are contributing significantly to price increases and that current policies to encourage biofuels use should be ended. The G20, of course, is only a reluctant part of that consensus.

The report, and Sophia Murphy’s blog post, are important contributions and worth reading. Here is a short excerpt from the report, which shows that despite continued claims that growing demand for meat in China and India is driving food and feed demand, the growth in demand for cereals, excluding biofuels demand, averaged 1.3% since 2000, only slightly higher than in the 1990s and slower than in the previous three decades. Biofuels demand added half a percentage point to that global demand.

Here’s the excerpt, from page 32:

The biofuel boom had a major impact on the evolution of world food demand for cereals and vegetable oils. Table 8 presents the growth rate of world consumption of cereals and distinguishes between feed and non-feed uses. It appears that, following a slowing down provoked by the collapse of the USSR, the acceleration of the world consumption growth between the 1990s and the 2000s was supported by the acceleration in the growth of both feed and non-feed uses.

The apparent acceleration of feed use in the last decade, however, is more linked to a recovery of feed use in the Former Soviet Union after the 1990s. It means that, even with the booming demand for meat in Asia, the growth of feed consumption outside the Former Soviet Union is not accelerating but is slowing down. Conversely there is a real acceleration of non-feed uses boosted by biofuel development. Excluding use for biofuel, the growth rate for non-feed use is stable compared with the 1990s and markedly inferior to its historical performance. Without biofuel, the growth rate of world cereal consumption is equal to 1.3 percent compared with 1.8 percent for biofuel.

The G20 agriculture ministers dodged most of the tough issues in their meeting last month in Paris, leaving the heavy lifting on France’s ambitious G20 agenda to finance ministers later this year. Among the dodged issues were agricultural price volatility and the so-called “financialization” of commodity markets. Despite a relatively ambitious set of reforms proposed by an interagency group, the agriculture ministers “action plan” took very few actions beyond pushing for better information on grain inventories, as Jennifer Clapp and Sarah Martin explained on this blog. Action was missing, too, on a more serious consideration of grain reserves to curb price volatility (see Sophia Murphy’s recent post).

For their part, volatility and speculation celebrated the continued inaction by further roiling commodity markets, driving global food prices to new highs. And the debate rages on over the extent to which financialization and speculation are to blame for the spike in commodity prices. As I noted in earlier posts and subsequent comments (here and here), the disagreement is less over whether financial speculation causes volatility on commodities futures markets than it is over whether volatile futures markets drive up real commodity prices.

Fortunately, new research from UNCTAD is drawing light from the heat of the debate. The June report “Price Formation in Financialized Commodity Markets,” reviews the evidence and concludes that while market fundamentals determine medium and long-run commodity prices, financial speculation can lead to significant short-term price distortions in real commodity prices.

Information, of course, is the key to effective price discovery, all the more so in today’s uncertain markets. As UNCTAD explains, there is strong evidence for the rise of herd behavior among traders, who have an incentive to follow market movements rather than market fundamentals. Commodity exchanges intended to convert many independent actions in the market into dependable price discovery no longer play that role. As UNCTAD notes:

“The financialization of commodity trading has increasingly jeopardized this function of commodity exchanges. Financial investors in commodity markets base their position-taking on risk and return considerations for which information about other asset markets and the overall economy play a key role, as do financial motives more generally. Such trading behaviour, while relying on similar types of information, also anticipates the price impact of that information in similar ways. Taken together, the financialization of commodity trading poses the risk of herd behaviour and of self-fulfilling prophecy due to the pecuniary power of these market participants.”

Because market fundamentals tightened during the same period that financial speculation and index funds grew so dramatically, it is difficult to discern the impact of financialization. UNCTAD cites new research that does just that, refuting the contention that financial speculation played no role in the 2007-8 price spikes. Other cited research shows that index investors contributed to price increases for crude oil, wheat and maize well beyond the levels we would have seen without the futures speculation by index funds.

Interestingly, UNCTAD offers its own new research documenting the growing and determining role of money managers, who now hold roughly the same volume of open long positions as the index funds. UNCTAD’s research suggests that they are now driving the speculative price cycle, leaving commercial hedgers overwhelmingly holding short positions as they ride the financialized futures roller coaster.

UNCTAD’s new report complements other new work by Chowdury on the link between speculation and food prices, and a recent article by Jayati Ghosh on speculation in petroleum markets. Meanwhile, Robert Pollin and James Heintz show in a recent study that as much as 20% of the current price of U.S. gasoline at the pump is due to speculation in oil markets.

The G20 should pay attention to the new research when it takes up the crucial questions of price volatility and financial speculation in agricultural markets. And they should adopt some of UNCTAD’s recommendations, which include not only grain reserves and stronger regulation to ensure transparency (in line with Dodd-Frank), but also a financial transactions tax to curb excessive financial speculation.