You are currently browsing the monthly archive for December 2008.
National Intelligence Council (NIC) – the US center for midterm and long-term strategic thinking – published in November 2008 a document called “Global Trends 2025: The National Intelligence Councils 2025 Project” (PDF 8,3MB here), which also contains (although a pretty short one) paragraph: “Water, Food, and Climate Change” (pages 51-57).
The NIC describes the document as follows:
“/…/ it takes a long-term view of the future. It offers a fresh look at how key global trends might develop over the next 15 years to influence world events. Our report is not meant to be an exercise in prediction or crystal ball-gazing. Mindful that there are many possible “futures,” we offer a range of possibilities and potential discontinuities, as a way of opening our minds to developments we might otherwise miss. /…/ the project’s primary goal is to provide US policymakers with a view of how world developments could evolve, identifying opportunities and potentially negative developments that might warrant policy action.”
Some out-takes from the aforementioned paragraph of the document [the links are added my me]:
- Experts currently consider 21 countries with a combined population of about 600 million to be either cropland or freshwater scarce. Owing to continuing population growth, 36 countries, home to about 1.4 billion people, are projected to fall into this category by 2025. Among the new entrants will be Burundi, Colombia, Ethiopia, Eritrea, Malawi, Pakistan and Syria. [at least one of them - Pakistan - has nuclear capabilities and there isn't much certainty about one of them (Syria) - my addition]
- In developing countries, agriculture currently consumes over 70 percent of the world’s water.
- The World Bank estimates that demand for food will rise by 50 percent by 2030, as a result of growing world population, rising affluence, and shifts to Western dietary preferences by a larger middle class.
- /…/ farm production probably will continue to be hampered by misguided agriculture policies that limit investment and distort critical price signals.
- If political elites are more worried about urban instability than rural incomes—a safe bet in many countries—these policies are likely to persist, increasing the risk of tight supplies in the future.
- Between now and 2025, the world will have to juggle competing and conflicting energy security and food security concerns, yielding a tangle of difficult-to-manage consequences.
- This “fuel farming” tradeoff, coupled with periodic export controls among Asian producers and rising demand for protein among growing middle classes worldwide, will force grain prices in the global market to fluctuate at levels above today’s highs. Some economists argue that, with international markets settling at lower grain volumes, speculation—invited by expectations of rising fuel costs and more erratic, climate change-induced weather patterns—could play a greater role in food prices.
- A consortium of large agricultural producers—including India and China, along with the US and EU partners—is likely to work to launch a second Green Revolution, this time in Sub-Saharan Africa, which could help dampen price volatility in worldwide grain markets.
- Perceptions of a rapidly changing environment may cause nations to take unilateral actions to secure resources, territory, and other interests.
Some say that nowadays it’s impossible to predict further than 10 years… nevertheless, it’s interesting to read long-term “future papers”.
Last week the European Commission released a communication on Food prices in Europe (PDF here).
It’s a rather interesting read that has a separate section about the contribution of speculation to agricultural commodity price developments.
The document states for example:
The surge in agricultural commodity prices resulted from a combination of structural and temporary factors. Structural factors such as global population growth, rising incomes in emerging economies and the development of new market outlets have contributed to a gradual rise in world demand. Global supply was unable to keep pace due to a slowdown in the growth of food crop grain yields and the characteristics of world agricultural markets which are thin and typically constrained by the seasonality of production. Moreover, increasing production costs, due inter alia to rising energy prices, spilled over on agricultural commodity prices. The impact of these structural factors was amplified by large production shortfalls resulting from adverse weather conditions and trade restrictions imposed by several exporting countries. Exchange rate developments, growing speculative activity in the commodity derivative markets and the close relationship between agricultural and other commodity markets, such as the oil market, also affected agricultural commodity price developments. The contribution of these various factors varies between sectors. For example, changes in wheat and rice prices are largely attributable to supply-side factors while maize and soybean markets have been mainly driven by a strong growth in global demand both for meat consumption and for industrial use.
Commodity prices have sharply declined over the most recent months and have come back to levels similar to or even below those before the price spikes.
Sounds a lot like the EU sees that the drastic surge in food prices was mainly due to the combination of various factors at the same time – basically what you’d call a “perfect storm” scenario.
The EC also predicts that the food prices remain high and also volatile in medium-term perspective:
In spite of the major uncertainty surrounding future price developments, structural factors like the growth in global food demand, the development of new market outlets and the long-term decline in food crop productivity growth are likely to hold up prices over the medium-term. /…/ Prices are also expected to show greater fluctuations than observed over recent decades as stock levels remain relatively tight. As a result, any significant changes to supply or demand could quickly result in higher price volatility.
The most interesting paragraph about the effect of speculation is as follows:
In any event, in recent years there has been substantial divergence for some commodities (notably wheat, soya and maize) between spot and future prices, which may well have made it more difficult for commercial operators to use future markets for traditional hedging activities, raising questions about the efficiency of the markets in achieving price discovery and hedging opportunities.
The communication also states that the Commission will keep an eye on the markets for agricultural commodities futures to avoid the potential damage of excessive volatility and the build up of herd like speculative positions – they will also examine possibilies of taking regulatory initiatives in this field.
The fast rise in food prices that we saw the past year has had an equally fast drop in the last few months:
Source: FT Alphaville
The fact that the price of food has fallen quite dramatically in the last months, has the people thinking that it was just a temporary fluctuation and that the era of cheap food has returned again. I wouldn’t be so optiomistic about that – I predict that the price fluctuations will remain and that the price of food will remain highly volatile for years to come.
