lei presentation final
DESCRIPTION
"Why are food prices high?" A presentation I held with Karl Shutes on 25 March 2011 organised by the Ministry of Economics, Agriculture and Innovation. A special focus on the role of speculation.TRANSCRIPT
Gerdien Meijerink
Karl Shutes
Why are food prices high?
Date
Ind
ex
Va
lue
100
120
140
160
180
200
220
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Food Price Index (Monthly 1990-2011)
Source: FAO
Cereals Price Index
Date
Ind
ex
Va
lue
100
150
200
250
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: FAO
Source: FAO
Food Expenditure
Source: ERS/USDA
Food prices
Why are food price so high?
Supply Underinvestment in agri-sector Extreme events eg weather shocks
Demand Macroeconomic factors Changing patterns of demand Alternative uses eg biofuels
Stock levels Act as a buffer to counter shocks
USD- Euro etc Trade Policies
Import/ Export bans Speculation Political economy factors
Global grain production and consumption
Source: USAID, 2011
Global stocks to use ratio
Demand for Commodities
Source: Wright, 2009
Potentially made worse by time lags in crops
Stocks To Use Ratios
Source: FAO
Year
Sto
cks
To
Use
Rat
io
20
25
30
35
1990 1995 2000 2005 2010
Crop
Corn
Wheat
Hig
h P
rices
Low
Pric
es
Hig
h P
rices
Source: USDA
Export restrictions (rice market)
Source: Heady, 2010
Corn Prices (Daily data 1999-2010)
Who are Speculators?
There is no single answer A trader who seeks to earn profit and in doing so takes
on (additional) risk Whereas a hedger is looking to minimize their
exposure to certain risks Not a mutually exclusive group
Can be classified by the types of trade• Scalping- minute to minute trades• Day traders- a view over a day with no overnight position• Position traders- hold alonger position either outright or spread
Corn CBOT Open InterestLong Positions Short Positions
Open Interest: is the total amount of all futures contracts entered into and not yet offset by a transaction, delivery, excercise, etc (CFTC)
CFTC Definition Commericals
Dealers/ Merchants Manufacturers Agricultural or Natural Resource traders Producers Swap and Derivative Traders (moved category in other
data) Non-Commercials
Hedge funds Floor brokers Non registered participants
Speculation is risky: Tony Ward
Bought 241.000 tonnes of cocoa (about $1bn) Crops better than expected
Political impact reduced Prices fell 25% since delivery in August
Speculative Instruments
OTC (Over The Counter) Forwards
• Delivery at a price set now
Swaps• A fixed price is exchanged for a fixed price• Similar to a portfolio of forwards of different maturities but the same
fixed price
Exchange based Futures
• Standardised forward (approximately)
OTC Potentially higher counter-party risks of defaulting Problems with price transparency Double coincidence of wants
Exchange trading High leverage
• Exposure to price movements can be very high
No double coincidence of wants
Current Research
Does speculation cause high food prices? Causality is used in a very specific sense of temporal
ordering• Atheoretical time series framework• Christmas cards Granger cause Christmas
Better interpreted as leading not causing Evidence of a latent variable
• Some extra missing factor that is not included in the analysis
Speculation Causes Price Rises
Cooke & Robles (2009) Monthly prices- wheat, corn, rice & soybeans Macro data included eg USD-Euro Short time series
• Low power• Structural breaks in series further reduces span
Speculative proxies Granger caused food price rises until the food crisis and then ceased to have explanatory power
Robles, Torero & von Braun 30 month rolling analysis on monthly data Speculation proxies: net positions, non-commercials to
reportables Granger causality found in wheat, maize, soybeans &
rice for some of the proxies• No single proxy was found to be significant across commodities
Gilbert (2009, 2010) Granger causality tests in a number of markets Funds appear to be a mechanism for transmitting
information about, for example Chinese economic growth rather than a cause of and in itself
Common factors might account for some of the findings
Speculation Does Not Cause Price Rises
Harris & Buyuksahin (2009) Oil speculation volumes are Granger caused by price
changes Speculation follows the trending prices & does not
create the trend
Sanders, Irwin etal (2008, 2010) Theoretical linkages not demonstrated
• Money moving into the market does not constitute demand except through the belief that this constitutes new improved information
• Impact on Spot by participating in only derivatives markets• Price rises occurred in markets without speculation
Granger causality tests on weekly returns and volatilities suggest the hypothesis of Granger causality is not accepted in a majority of cases
Working’s measure of speculative activity• Speculators required to meet liquidity and hedging needs• Long only funds meeting unbalanced short hedges• No large changes in the measure over 1995-2008
– Corn ranged from 1.06 to 1.13
Summary
Empirical evidence is inconclusive: Granger causality is not causality
Need theory to explain link between futures prices and cash prices (often missing in studies)
Theory: spot prices drive futures prices, not the other way round
LEI’s Ongoing Research
Econometric multivariate model examining the role of cross correlations in the returns on a broader universe of commodities and equity The funds are interested in a diversified portfolio Portfolio correlations are going to be important in their
decisions Modelling time varying risk premia explicitly
Research on trade restrictions Update on the 2008 report “why are food prices
so high?”