There’s been much talk in the media about how the initial protests in Tunisia, Egypt, Yemen, and Jordan were, at least partly, sparked by unrest due to rising commodity and food prices. What’s been discussed much less is the underlying cause of these price spikes. Is it speculation, or an actual increase in consumption (or a decrease in yields)?
I hadn’t thought much about it until a reader sent me this article written by Joel Brinkley, a Stanford journalism professor who’s a foreign correspondent for the NYT (syndicated in my hometown’s daily newspaper):
The world is heading into a food crisis again, barely three years after the last one in 2008. That, not political reform, animated the riots and demonstrations across the Arab world and beyond – until Tunisia’s president fell from power on Jan. 14. After that, hungry demonstrators aimed higher.
Now, whatever the final results in Tunisia, Egypt, Yemen, Algeria and other states that have been under siege, millions of people in these places still will not be able to afford enough food for their families.
Okay so far. He continues:
Who’s to blame for all of this? America and other wealthy nations, in large part. When commodity prices begin to rise, Western speculators start buying commodity shares, driving prices even higher. After hearing about poor wheat crops in Russia and Ukraine last August, speculators drove the wheat price up by 80 percent.
These are some pretty bold assertions. There have been many inconclusive debates about whether financial trading in commodities is the cause of the recent spike in prices, and I find it a bit misleading to conclude that financial speculators are the cause.
In fact, Paul Krugman disagrees with Brinkley, suggesting it’s much more likely a different form of speculation: commodity hoarding. Not by the west, but by China:
I’ve been getting a fair bit of correspondence insisting that political unrest, in the Arab world and elsewhere, is being caused by … Ben Bernanke. You see, quantitative easing is responsible for rising food prices, which leads to riots, which — OK, there are a lot of broken links in that chain. But it surely is time to take a look at food prices and commodity prices more broadly.
During the last commodity price spike, less than three years ago, many people laid the blame at the feet of speculators. I never accepted that as the prime cause, mainly because so many of the speculation-did-it people seemed confused about the difference between buying a futures contract and actually hoarding physical stocks; as a very useful analysis by Sanders and Irwin (pdf) puts it,
Index fund buying is no more “new demand” than the corresponding selling is “new supply.”
True, high futures prices can provide an incentive to accumulate physical stocks. But during the 2007-2008 price surge there was little evidence of such accumulation.
What about this time?
First and foremost, China: it’s clear from news coverage that Chinese demand is driving the markets. As I and others have been pointing out, we’ve got a bifurcated world right now, with advanced economies still depressed but emerging economies in an inflationary boom; commodity prices are reflecting the boom part of the picture.
But Chinese demand isn’t just a matter of fundamentals: all the evidence suggests that there’s a lot of physical hoarding going on. Chinese farmers are apparently hoarding lots of cotton, while China is holding record stockpiles of iron ore.
So the case for a speculative component is a lot stronger this time around. But — and this is important — the speculation is not being driven by financialization, by all those index fund investors going long. Cotton hoarding seems to be taking place at the level of individual Chinese farmers and factories, with no indication that they’re being influenced by the futures market.
So the answer seems to be speculation. Of which kind? I find Krugman’s position to be a bit more compelling.
Update: About an hour after I posted this, Krugman made a case for low grain yields also contributing to the rising prices.