Commodity Markets and Food Security
Joachim von BraunCenter for Development Research (ZEF),
University of Bonn, Germany
“Global Cooperation for Sustainable Growth and Development – Views from G20
Countries” - Conference, New Delhi, ICRIER
Sept. 13-14, 2011
Joachim von Braun, ZEF 2011
Outline
• The state of food markets and cost of volatility
• Explaining food price volatility
• Proposed policy actions for G20
Joachim von Braun, ZEF 2011
Food price – drivers: old and new
Old Fundamentals
- supply / demand / stocks remain main drivers
- the source of old fundamentals is changing from US to emerging
economies such as China, India, Brazil, etc.
New Fundamentals
- Energy market linkages
- Financial market linkages
- Speculation, in combination with trade policy
Joachim von Braun, ZEF 2011
Level Change, Volatility, Spikes 2004 - 2011: food price indices (monthly)
0
50
100
150
200
250
300
350
400
2004
M01
2004
M03
2004
M05
2004
M07
2004
M09
2004
M11
2005
M01
2005
M03
2005
M05
2005
M07
2005
M09
2005
M11
2006
M01
2006
M03
2006
M05
2006
M07
2006
M09
2006
M11
2007
M01
2007
M03
2007
M05
2007
M07
2007
M09
2007
M11
2008
M01
2008
M03
2008
M05
2008
M07
2008
M09
2008
M11
2009
M01
2009
M03
2009
M05
2009
M07
2009
M09
2009
M11
2010
M01
2010
M03
2010
M05
2010
M07
2010
M09
2010
M11
2011
M01
2011
M03
2011
M05
Beverages
Food
Grains
Fats and oils
Joachim von Braun, ZEF 2011
Human costs:
Food crises have made child malnutrition worse
Joachim von Braun, ZEF 2011
Food crisis has triggered riots
Source: von Braun, 2009
Joachim von Braun, ZEF 2011
Cost components of volatility
1. increased hunger and disease
2. reduction of investment incentives
3. distorted asset markets (land prices and
commodities)
4. fiscal and macro-economic effects
5. growing political insecurity
Joachim von Braun, ZEF 2011
Outline
• The state of food markets and cost of volatility
• Explaining food price volatility
• Proposed policy actions for G20
Joachim von Braun, ZEF 2011
Food price volatility drivers?
VOLATILITY OF FOOD PRICE
= f [SUPPLY SHOCKS;
ENERGY PRICE VOLATILITY;
FINANCIAL CRISES]
Joachim von Braun, ZEF 2011
Volatility and supply shocks (e.g. maize)
010
20
30
40
50
60
70
80
Sup
ply
sh
ock in
mill
ion
s o
f to
n
0.2
.4.6
pri
ce v
ola
tilit
y
1970 1980 1990 2000 2010year
price volatility Supply shock in millions of ton
Fig.6a. Price volatility and supply shock-maize
Volatility is measured as the coefficient of variation of monthly prices
Supply shock is measured as the absolute value of difference between de-trended supply and the actual supply
Joachim von Braun, ZEF 2011
Volatility and oil price
0.2
.4.6
.8
1970 1980 1990 2000 2010year
maize Wheat
Crude oil
Fig 4. Food and energy prices volatility
The association was positive until 1996,
Remained strongly negative until the food crisis started in late 2006
After the crisis the correlation is not only positive but it becomes stronger.
Joachim von Braun, ZEF 2011
Volatility and Financial Crises
Source: BCDI index from Reinhart and Rogoff (2009), Wheat prices are interpolated from BLS 2008,
Godo 2001, NBER 2008, OECD 2005, U.S. Census Bureau 2008, and United Nations 1999
Joachim von Braun, ZEF 2011
Volatility boosted by Speculation in futures markets
•The speculation effect depends on the „nervousness‟ of
the market
• stabilizes when the market is less nervous through
price discovery
• destabilizes when the market become nervous as a
result of changes in fundamentals, policies and
structures
• Unconditional control of speculative transaction
undermines the stabilization effect
Joachim von Braun, ZEF 2011
Speculation - Evidence of causality in the 2008 spike
-5
-4
-3
-2
-1
0
1
2
3
4
5
Jun
-04
Au
g-0
4
Oc
t-0
4
De
c-0
4
Fe
b-0
5
Ap
r-0
5
Jun
-05
Au
g-0
5
Oc
t-0
5
De
c-0
5
Fe
b-0
6
Ap
r-0
6
Jun
-06
Au
g-0
6
Oc
t-0
6
De
c-0
6
Fe
b-0
7
Ap
r-0
7
Jun
-07
Au
g-0
7
Oc
t-0
7
De
c-0
7
Fe
b-0
8
Ap
r-0
8
Jun
-08
Au
g-0
8
Oc
t-0
8
De
c-0
8
Fe
b-0
9
Ap
r-0
9
Jun
-09
Ind
ex
= F
sta
tis
tic
-
F c
rit
ica
l v
alu
e
Last month of a 30-months period
Evidence of speculation influencing commodity prices(positive numbers on vertical axis shows evidence of influence)
Wheat: Volume/Open Interest
Rice: Volume/Open Interest
Rice: ratio non-commercial long positions
Corn: ratio non-commercial short positions
Soybeans: ratio non-commercial short positions
sample in Robles et al (2009) new sample
Food crisis period
Joachim von Braun, ZEF 2011
Volatility in global food markets and determinants (wheat, maize)
Pooled
Supply Shock in millions of tons 0.0014
(0.006)
Financial crisis 0.001
(0.06)
Oil price volatility 0.235
(0.00)
Constant -0.004
(0.85)
R-square 0.52
N 46
• The effect of supply shocks, financial crisis and oil price volatility on food price volatility ( P-values )
Elasticities: % increase of food price volatility due to a 1% increase in supply
shocks (0.22), financial crises index (0.6) and oil price volatility (0.32). Source: von Braun, Tadesse, IEA-Paper, 2011.
Joachim von Braun, ZEF 2011
Outline
• The state of food markets and cost of volatility
• Explaining food price volatility
• Proposed policy actions for G20
Joachim von Braun, ZEF 2011
Strategic agenda
1. Promote pro-poor agriculture growth with technology
and institutional innovations
2. Expand social protection and child nutrition action
3. Reduce market volatility
Joachim von Braun, ZEF 2011
What to do about volatility?
1. Keep trade open at times of global and regional food shortage
is a must
2. Regulation of food commodity markets? (only as part of
financial markets)
3. Establish grain reserves policy at global level (emergency
reserve, shared physical reserves, and a virtual reserve)
Joachim von Braun, ZEF 2011
Required international institutional arrangements
• Unilateral food market actions lead to global collective action
failures
• The agenda is too complex for declarations and for delegation
of selected issues to selected current international agencies
• A new multilateral organization is needed to watch matters
and to guide policy and to engage in curbing food price
volatility : an “international grain reserves bank”.