Lei Presentation Final


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"Why are food prices high?" A presentation I held with Karl Shutes on 25 March 2011 organised by the Ministry of Economics, Agriculture and Innovation. A special focus on the role of speculation.

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Lei Presentation Final

  1. 1. GerdienMeijerink<br />Karl Shutes<br />Why are food prices high?<br />
  2. 2. Food Price Index (Monthly 1990-2011)<br />Source: FAO<br />
  3. 3. Cereals Price Index<br />Source: FAO<br />Source: FAO<br />
  4. 4. Food Expenditure<br />Source: ERS/USDA<br />
  5. 5. Food prices<br />
  6. 6. Why are food price so high?<br />Supply<br />Underinvestment in agri-sector<br />Extreme events eg weather shocks<br />Demand<br />Macroeconomic factors<br />Changing patterns of demand<br />Alternative uses eg biofuels<br />Stock levels<br />Act as a buffer to counter shocks<br />USD- Euro etc<br />Trade Policies<br />Import/ Export bans<br />Speculation<br />Political economy factors<br />
  7. 7. Global grain production and consumption<br />Source: USAID, 2011<br />
  8. 8. Global stocks to use ratio<br />
  9. 9. Demand for Commodities<br />Potentially made worse by time lags in crops<br />Source: Wright, 2009<br />
  10. 10. Stocks To Use Ratios<br />High Prices<br />High Prices<br />Low Prices<br />Source: USDA<br />Source: FAO<br />
  11. 11. Export restrictions (rice market)<br />Source: Heady, 2010<br />
  12. 12. Recap of Banse, Nowicki & van Meijl<br />Fundamental data<br />Low inventories<br />Supply side shocks such as weather<br />Oil Prices<br />Biofuel demand<br />Role of Speculation?<br />
  13. 13. Corn Prices (Daily data 1999-2010)<br />
  14. 14. Who are Speculators?<br />There is no single answer<br />A trader who seeks to earn profit and in doing so takes on (additional) risk<br />Whereas a hedger is looking to minimize their exposure to certain risks<br />Not a mutually exclusive group<br />Can be classified by the types of trade<br />Scalping- minute to minute trades<br />Day traders- a view over a day with no overnight position<br />Position traders- hold alonger position either outright or spread<br />
  15. 15. Corn CBOT Open Interest<br />Short Positions<br />Long Positions<br />Open Interest: is the total amount of all futures contracts entered into and not yet offset by a transaction, delivery, excercise, etc (CFTC)<br />
  16. 16. CFTC Definition<br />Commericals<br />Dealers/ Merchants<br />Manufacturers<br />Agricultural or Natural Resource traders<br />Producers<br />Swap and Derivative Traders (moved category in other data)<br />Non-Commercials<br />Hedge funds<br />Floor brokers<br />Non registered participants<br />
  17. 17. Speculation is risky: Tony Ward<br />Bought 241.000 tonnes of cocoa (about $1bn)<br />Crops better than expected<br />Political impact reduced<br />Prices fell 25% since delivery in August<br />
  18. 18. Speculative Instruments<br />OTC (Over The Counter)<br />Forwards<br />Delivery at a price set now<br />Swaps<br />A fixed price is exchanged for a fixed price<br />Similar to a portfolio of forwards of different maturities but the same fixed price<br />Exchange based<br />Futures<br />Standardised forward (approximately)<br />
  19. 19. OTC<br />Potentially higher counter-party risks of defaulting<br />Problems with price transparency<br />Double coincidence of wants<br />Exchange trading<br />High leverage<br />Exposure to price movements can be very high<br />No double coincidence of wants<br />
  20. 20. Current Research<br />Does speculation cause high food prices?<br />Causality is used in a very specific sense of temporal ordering<br />Atheoretical time series framework<br />Christmas cards Granger cause Christmas<br />Better interpreted as leading not causing<br />Evidence of a latent variable<br />Some extra missing factor that is not included in the analysis<br />
  21. 21. Speculation Causes Price Rises<br />Cooke & Robles (2009)<br />Monthly prices- wheat, corn, rice & soybeans<br />Macro data included eg USD-Euro<br />Short time series<br />Low power<br />Structural breaks in series further reduces span<br />Speculative proxies Granger caused food price rises until the food crisis and then ceased to have explanatory power<br />
  22. 22. Robles, Torero & von Braun<br />30 month rolling analysis on monthly data<br />Speculation proxies: net positions, non-commercials to reportables<br />Granger causality found in wheat, maize, soybeans & rice for some of the proxies<br />No single proxy was found to be significant across commodities<br />
  23. 23. Gilbert (2009, 2010)<br />Granger causality tests in a number of markets<br />Funds appear to be a mechanism for transmitting information about, for example Chinese economic growth rather than a cause of and in itself<br />Common factors might account for some of the findings<br />
  24. 24. Speculation Does Not Cause Price Rises<br />Harris & Buyuksahin(2009)<br />Oil speculation volumes are Granger caused by price changes<br />Speculation follows the trending prices & does not create the trend<br />
  25. 25. Sanders, Irwin etal (2008, 2010)<br />Theoretical linkages not demonstrated<br />Money moving into the market does not constitute demand except through the belief that this constitutes new improved information<br />Impact on Spot by participating in only derivatives markets<br />Price rises occurred in markets without speculation<br />Granger causality tests on weekly returns and volatilities suggest the hypothesis of Granger causality is not accepted in a majority of cases<br />Working’s measure of speculative activity<br />Speculators required to meet liquidity and hedging needs<br />Long only funds meeting unbalanced short hedges<br />No large changes in the measure over 1995-2008 <br />Corn ranged from 1.06 to 1.13<br />
  26. 26. Summary<br />Empirical evidence is inconclusive: Granger causality is not causality<br />Need theory to explain link between futures prices and cash prices (often missing in studies)<br />Theory: spot prices drive futures prices, not the other way round<br />
  27. 27. LEI’s Ongoing Research<br />Econometric multivariate model examining the role of cross correlations in the returns on a broader universe of commodities and equity<br />The funds are interested in a diversified portfolio<br />Portfolio correlations are going to be important in their decisions<br />Modelling time varying risk premia explicitly<br />Research on trade restrictions<br />Update on the 2008 report “why are food prices so high?”<br />