Modeling Speculation and Drought Risk in Food Commodity Prices

Summary

This update examines whether a severe drought in the US Midwest could bring forward a food-price crisis. It builds on an earlier quantitative account of food prices that attributes price dynamics to both corn conversion into ethanol and trend-following financial speculation, rather than to supply and demand alone. The authors report that the model matched historical prices and that a prior update anticipated further price increases.

For the drought scenario, the authors conclude that reduced crop supply could trigger another price bubble earlier than expected, before scheduled limits on speculation take effect. They suggest reducing corn use for ethanol as a near-term response and restricting financial speculation as a longer-term stabilization measure. These are the paper’s model-based interpretations and policy proposals; the document provides no detailed model specification, data, uncertainty ranges, or independent validation for the updated drought assessment. Its claims therefore should be read as the authors’ analysis, not as established causal findings.

Key ideas

• The proposed price model combines corn-to-ethanol conversion with trend-following speculation.
• The authors use the model to assess how a US Midwest drought might affect global food prices.
• They argue that drought could bring a further price spike forward in time.
• The paper proposes reducing ethanol-related corn demand for immediate relief and limiting speculation over the longer term.
• The provided account does not show uncertainty estimates or detailed validation of the drought scenario.

Tags

# UPDATE July 2012 | The Food Crises: The US Drought


# UPDATE July 2012 | The Food Crises: The US Drought









Recent droughts in the midwestern United States threaten to cause global catastrophe driven by a speculator amplified food price bubble. Here we show the effect of speculators on food prices using a validated quantitative model that accurately describes historical food prices. During the last six years, high and fluctuating food prices have lead to widespread hunger and social unrest. While a relative dip in food prices occurred during the spring of 2012, a massive drought in the American Midwest in June and July threatens to trigger another crisis. In a previous paper, we constructed a model that quantitatively agreed with food prices and demonstrated that, while the behavior could not be explained by supply and demand economics, it could be parsimoniously and accurately described by a model which included both the conversion of corn into ethanol and speculator trend following. An update to the original paper in February 2012 demonstrated that the model previously published was predictive of the ongoing price dynamics, and anticipated a new food crisis by the end of 2012 if adequate policy actions were not implemented. Here we provide a second update, evaluating the effects of the current drought on global food prices. We find that the drought may trigger the expected third food price bubble to occur sooner, before new limits to speculation are scheduled to take effect. Reducing the amount of corn that is being converted to ethanol may address the immediate crisis. Over the longer term, market stabilization requires limiting financial speculation.

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

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.