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Financial Speculation and Food markets/We’ve been scooped!

7 March, 2012

Well not really. But way back in the yonder of a few years (possibly in 2010?) ago Mike and I talked about writing a paper on food prices and commodity speculation. As usual with all our slackerdom someone looked at this and done a paper on it. Admitedly they did all the dynamic modelling work (i.e. theory) and we wanted to do (or certainly I wanted to) an empirical model. Anyways, this is obviously an aside of little value but I would recommend looking at the paper for it looks very interesting and ticks all the boxes that we tend to like.

So without further ado I give you three abstracts and links:

The Food Crises: A quantitative model of food prices including speculators and ethanol conversion

Abstract: Recent increases in basic food prices are severely impacting vulnerable populations worldwide. Proposed causes such as shortages of grain due to adverse weather, increasing meat consumption in China and India, conversion of corn to ethanol in the US, and investor speculation on commodity markets lead to widely diff ering implications for policy. A lack of clarity about which factors are responsible reinforces policy inaction. Here, for the first time, we construct a dynamic model that quantitatively agrees with food prices. The results show that the dominant causes of price increases are investor speculation and ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifi cally due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion. The model includes investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Claims that speculators cannot influence grain prices are shown to be invalid by direct analysis of price setting practices of granaries. Both causes of price increase, speculative investment and ethanol conversion, are promoted by recent regulatory changes|deregulation of the commodity markets, and policies promoting the conversion of corn to ethanol. Rapid action is needed to reduce the
impacts of the price increases on global hunger.
link

Citation: M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam, The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion. arXiv:1109.4859, September 21, 2011.

UPDATE February 2012 | The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion

Abstract: Increases in global food prices have led to widespread hunger and social unrest|and an imperative to understand their causes. In a previous paper published in September 2011, we constructed for the fi rst time a dynamic model that quantitatively agreed with food prices. Specifi cally, the model t the FAO Food Price Index time series from January 2004 to March 2011, inclusive. The results showed that the dominant causes of price increases during this period were investor speculation and ethanol conversion. The model included investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Here,

we extend the food prices model to January 2012, without modifying the model but simply continuing its dynamics. The agreement is still precise, validating both the descriptive and predictive abilities of the analysis. Policy actions are needed to avoid a third speculative bubble that would cause prices to rise above recent peaks by the end of 2012.
link

citation: M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam, UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion. arXiv:1203.1313, March 6, 2012.

The Food Crises and Political Instability in North Africa and the Middle East

Abstract: Social unrest may reflect a variety of factors such as poverty, unemployment, and social injustice. Despite the many possible contributing factors, the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specifi c food price threshold above which protests become likely. These observations suggest that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations. If food prices remain high, there is likely to be persistent and increasing global social disruption. Underlying the food price peaks we also find an ongoing trend of increasing prices. We extrapolate these trends and identify a crossing point to the domain of high impacts, even without price peaks, in 2012-2013. This implies that avoiding global food crises and associated social unrest requires rapid and concerted action.
link

citation: M. Lagi, K.Z. Bertrand, Y. Bar-Yam,The Food Crises and Political Instability in North Africa and the Middle East. arXiv:1108.2455, August 10, 2011.

Got to these gems thanks to Cory’s post at BoingBoing

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