May 31, 2011, by brzjch
High commodity prices and global food security – Dr John Strak
Food and commodity prices are in the news now – even making the front page of popular newspapers on regular occasions. Oxfam’s latest announcement on its expectations for crop prices makes for gloomy reading. And along with the news reporting there has been speculation about what the surge in commodity prices means for global food security. I need to make the distinction between the prices for “hard” commodities e.g. gold, silver, copper, etc and “soft” commodities such as wheat, maize, coffee, etc. and it’s the latter category my comments address in this Blog. What can economic research tell us about the relationship between commodity price volatility and food security? The answer is, quite a lot.
At the simplest level the idea that the effect of higher prices in one period is to create more supplies, and lower prices, in the next period is widely understood. That’s an idea that economics explains in detail. If a product is in short supply, high prices bring forward more supplies and, generally, economists see market prices as the best guide to delivering what consumers need. But deeper questions arise because markets that swing wildly from boom to bust do not encourage producers or processors in the food chain to invest and they may reduce the welfare of consumers – especially if their choices are restricted through low incomes or inadequate information. Furthermore, there are genuine questions about how much of the price increase may be caused by “real” factors and how much may be caused by “speculation”. A related question concerns the way in which price signals are transmitted up and down the food supply chain – if the price transmission process is not working efficiently the long run impact on production and economic welfare is likely to be negative.
The work I have done researching the behaviour of global meat prices tries to deal with the questions of why and how meat prices move up and down. It seems that these swings are typically initiated by unanticipated shifts in supply and demand, for example, disease outbreaks and health-related meat scares. I have found little, if any, evidence of speculation causing volatility in global meat prices. My colleagues in the Economics School in the University of Nottingham, Professor Wyn Morgan and Dr Tim Lloyd, have researched the way in which prices are transmitted along the food chain in the UK market. Their results suggest that there is room for improvement in the way in which price transmission works between farmers and retailers and consumers in the UK. The strength of the supermarkets is key, but that is a story for another day. Closer to home, Morgan and Lloyd in conjunction with colleagues at the University of Exeter have recently developed a statistical model that will allow the UK’s food and agriculture department, Defra, to forecast retail food prices more accurately on the basis of market developments in the UK (consumer demand) and overseas (commodity prices, exchange rates and oil prices).
Conclusions about how to deal with global food security derive from environmental and scientific research about aspects of productivity when using or combining resources, and from economic research about how the overall system operates to guide and allocate resources within periods and from one period to the next. An important conclusion from economics is that high commodity prices may not be bad for global food security.
John Strak is Special Professor of Food Economics in the School of Economics at The University of Nottingham, Editor of Whole Hog Brief, Managing Director of FoodEast Ltd and (previously) Managing Director of North Highland Products.
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