Extending a Food Price Model to Test Speculation and Ethanol Effects

Summary

This update extends a quantitative model of food prices through January 2012 without changing its structure. The original model was fitted to the FAO Food Price Index from January 2004 through March 2011. It includes investor trend-following, shifts of investment between commodities, equities and bonds in response to expected returns, and ethanol conversion. The authors attribute the period’s food price increases mainly to speculation and ethanol conversion.

The update reports that the unchanged model continues to match the added observations closely, which the authors present as evidence of descriptive and predictive validity. It also forecasts a possible further speculative bubble and argues for policy action. The supplied text gives no model equations, comparison with alternative explanations, uncertainty estimates, or independent validation details. Its causal conclusions and forecast should therefore be understood as the paper’s claims based on this model, not as settled findings or a trading signal.

Key ideas

• The update tests the existing food price model by extending its time series through January 2012 without modifying the model.
• The model includes trend-following investors and shifts among commodities, equities and bonds based on expected returns.
• Ethanol conversion is another mechanism included in the model and cited as a driver of food prices.
• The authors report that the unchanged model continues to fit the extended data closely.
• The projected speculative bubble and policy implications depend on the model’s assumptions and are not independently established in the supplied text.

Tags

# 1203.1313


# UPDATE February 2012 - The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion









Increases in global food prices have led to widespread hunger and social unrest---and an imperative to understand their causes. In a previous paper published in September 2011, we constructed for the first time a dynamic model that quantitatively agreed with food prices. Specifically, the model fit the FAO Food Price Index time series from January 2004 to March 2011, inclusive. The results showed that the dominant causes of price increases during this period were investor speculation and ethanol conversion. The model included investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Here, we extend the food prices model to January 2012, without modifying the model but simply continuing its dynamics. The agreement is still precise, validating both the descriptive and predictive abilities of the analysis. Policy actions are needed to avoid a third speculative bubble that would cause prices to rise above recent peaks by the end of 2012.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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