Sunday, October 2, 2011

The Marketplace of Life and death- food shortages and the causes



Recent increases in basic food prices are severely impacting vulnerable populations worldwide.
Proposed causes such as shortages of grain due to adverse weather, increasing meat consumption in
China and India, conversion of corn to ethanol in the US, and investor speculation on commodity
markets lead to widely di ering implications for policy. A lack of clarity about which factors are
responsible reinforces policy inaction. Here, for the rst time, we construct a dynamic model that
quantitatively agrees with food prices. The results show that the dominant causes of price increases
are investor speculation and ethanol conversion. Models that just treat supply and demand are
not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011
are speci cally due to investor speculation, while an underlying upward trend is due to increasing
demand from ethanol conversion. The model includes investor trend following as well as shifting
between commodities, equities and bonds to take advantage of increased expected returns. Claims
that speculators cannot in
uence grain prices are shown to be invalid by direct analysis of price
setting practices of granaries. 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

READ the entire article here:
http://necsi.edu/research/social/food_prices.pdf

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