The journalist asked:
1. The U.N. Food and Agriculture Organization's index of world food prices rose 32 percent in the second half of 2010, topping the peak of June 2008. In your analysis, what are the major reasons for such a great increase in a short time?
2. In your analysis, how much does the food speculation influence current high food price?
3. Money began to be taken out of the index funds in the couple of months before food prices began to fall dramatically in mid-2008. What about the situation in 2010? If the moneys pour into the field again, why?
4. In the past 2 years after food crisis in 2008, how did the biofuel develop around the world?
5. In your analysis, how much does biofuel influence current high food price? How?
6. U.S. government makes great effort to develop biofuel. What are the government’s concerns?
7. A EU-World Bank analysis of the causes of the 2007-2008 food price crisis blames energy prices and financial speculators for the hikes. Will the same situation happen in 2011? Is there any difference between the situation in 2008 and now?I was busy at the time and so a bit late in my replies, which were as follows:
1. I think prices are rising mainly in response to increased growth and demand in the Southern Hemisphere and Asia, but particularly from China.
2. Speculation is an important part of commodity prices, but as far as I can tell, only in good ways. For example, if the market expects demand to rise in the future, prices may go up today, since some of today's production will be placed in inventories in anticipation of higher future demand. Without speculation, we wouldn't have markets trying to maneuver production from times when it is less valued to times when it will be more valued.
Note that speculation does not necessarily imply a speculative bubble. I do not think there is a speculative bubble in commodities, nor do I think has been one in recent history. I agree with the likes of Paul Krugman who has pointed out several times, that for there to be a speculative bubble in commodity prices, there needs to be a general buildup in inventories. We have not seen such a buildup in inventories. It's been quite the opposite: prices have gone up in response to declines in inventories. This is what happened in 2008 as well.
3. I don't think the money coming out of index funds has anything to do with commodity prices.
4 & 5 I think biofuel demand, artificially stimulated by government subsidies, was a big factor in the 2008 rise and one factor keeping prices high today. In my work with Wolfram Schlenker (currently under revision for the American Economic Review) we find the *long run* effect of the biofuel demand on the world's major staple commodity prices is on the order of 20-30 percent. But in the short run, the spike could have been larger. It also had the effect of drawing down inventories which made market prices far more susceptible to temporary weather or other kinds of shocks.
6. I think U.S. biofuel policy is misguided, mainly for the reasons outlined in 4&5--these costs to the world, especially the world's poorest, are just too high. Also, I'm very skeptical that biofuels actually reduce CO2 emissions. The one benefit I see is that by subsidizing ethanol it may lead to innovation of other biofuels that make more sense. I hope that happens. Still, if that is the goal, a better policy would be to directly subsidize research and development, not production of the fuel itself.
7. Energy prices were a big part of the 2008 price spike, mainly due to the ethanol link. Speculation was not, as described above. Another big factor was global demand growth, much like it is today. For most of the last 75 years, growth in crop yields was faster than demand growth. That's no longer the case. Demand is growing faster than supply, and so prices are rising. It's hard to see what will reverse the new trend.
Today Krugman writes about commodity prices and makes some similar points. But I didn't know about the cotton hoarding in China. That may or may not be rational speculation--I just don't feel I know enough to venture a guess.