Food Price Rises: The Role of Speculation

Scientists from the New England Complex Systems Institute, in a paper published in September 2011, identified investor speculation and ethanol conversion as the two key causes of changes in food prices over the period 2004 to 2011. The latter linked to a gradual upward trend in prices, the former to food price spikes. Global food prices since 2007 have seen two surges whereby prices have increased by over 50% in less than a year. Authors of the paper warn that policy action to curb speculation in global food markets is urgent if we are to avoid another surge at the end of 2012. This is also important for the long-term given that the UN predicts food prices will rise by at least 40% in the next decade.

Speculation in the food market in the past has been limited to actors within the food industry itself. By setting a price, agreed between farmer and trader, prior to the harvest, risks were minimised as the farmer received a good price even in a bad year and the trader received a better than  average price in good years. In general, speculation had a stabilizing effect on food prices. With the liberalisation of markets in the late 1990s, however, non-food industry actors have become involved and speculation in the food commodities market by financial institutions has grown rapidly. In 2003 the market was worth £3 billion but by 2008 its worth had risen to over £55 billion. [Read more…]