Population Matters

Don’t Blame the Speculators

January 25th, 2011

Blame the speculators.  That, in essence, is what French President Nicolas Sarkozy told the world yesterday when he vowed to use his leadership of the G-20 to confront the current food crisis.  Rather than acknowledging that demand for food is outstripping the supply of food and shrinking global food reserves, he blames the problem on financial speculation and a lack of precise data on farm production and reserves.

There is, of course, a lot of ‘speculation’ in food commodities.  Speculation is what commodity markets do.   Investors in food commodities regularly sift through crop reports and weather forecasts to ‘speculate’ if the prices of wheat, corn, and other staples will be higher or lower in the months ahead.  Futures, as they are called, allow producers and purchasers to hedge their bets, and are essential to the smooth functioning of global markets.  

Scarcity, quite naturally, increases speculation.  When there’s a large crop failure or a drop in world grain reserves, prices become more volatile and speculation increases.  And because the demand for food is relatively inelastic, even small changes in crop forecasts can produce large swings in food prices when reserves are low.  And there’s little that Sarkozy and the G-20 can do about that. 

Similarly, requiring the Food and Agriculture Organization or some other international institution to gather more accurate information is not likely to help much.  Full and rapid disclosure of crop failures or shrinkage of grain reserves is not going to ease food inflation and it will do little, if anything, to moderate volatility.

World leaders, including the G20, could do something to mitigate the damage wrought by the current food crisis.  They could dissuade countries, like Russia, from banning food exports when there is a bad harvest.  Restricting food imports to keep domestic food prices artificially low only exacerbates the global food crisis.  But if recent experience is any guide, domestic concerns generally trump international concerns.  During the 2007-8, several nations, even relatively affluent countries, imposed export bans.  And that’s not likely to change in the current food crisis.

Truth is, when it comes to a global food crisis, there are not many good options. As Hafez Ghanem, the Assistant Director of the FAO, has concluded, “As long as the demand for food continues to rise faster than yield growth, markets will remain tight and prices will remain high and volatile.”

If Sarkozy and the leaders of the G-20 want to address the real problem, they should read a relatively unsung government report issued yesterday on the other side English Channel.   The report, which was issued by the U.K.’s top government think tank, raises profound questions about the longer-term food picture.  Here’s what it said:

The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.  Any one of these pressures (‘drivers of change’) would present substantial challenges to food security; together they constitute a major threat that requires a strategic reappraisal of how the world is fed.

The study (Final Report of the Foresight Global Food and Farming Futures Project) also raised important questions about the sustainability of current food production practices and their impact on the global environment:

Without change, the global food system will continue to degrade the environment and compromise the world’s capacity to produce food in the future, as well as contributing to climate change and the destruction of biodiversity. There are widespread problems with soil loss due to erosion, loss of soil fertility, salination and other forms of degradation; rates of water extraction for irrigation are exceeding rates of replenishment in many places; over-fishing is a widespread concern; and there is heavy reliance on fossil fuel-derived energy for synthesis of nitrogen fertilisers and pesticides. In addition, food production systems frequently emit significant quantities of greenhouse gases and release other pollutants that accumulate in the environment.

The U.K.’s study warned that:

Unless the footprint of the food system on the environment is reduced, the capacity of the earth to produce food for humankind will be compromised with grave implications for future food security. Consideration of sustainability must be introduced to all sectors of the food system, from production to consumption, and in education, governance and research.

World leaders, including Sarkozy, are right to be concerned about the current food crisis.  The topic will certainly be addressed at the upcoming Davos World Economic Forum. With riots breaking out in half a dozen countries and food prices still rising, every effort must be made to ensure that food assistance is given to those most in need, particularly the world’s urban poor.  But the real challenge, the one that should have world leaders working overtime, is the longer term food challenge.  Unless more is done to boost sustainable food production in the developing world, eliminate food waste, reduce meat consumption, and expand voluntary family planning, the current food crisis may be a harbinger of far worst things to come.  And there’s nothing that Sarkozy and the G-20 can do about it.

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