Tuesday, December 15, 2009

Food price inflation and speculation

Businessline has this graphic capturing the price trends for 16 major food items over the year, which have cumulatively shown a 35% increase in price.

In response to mounting pressure linking increases in prices to futures trading, the Government had banned trading in wheat, tur, rice and sugar futures since last year.

However, contradicting the commonly held view that speculative activity is behind price increases, based on the aforementioned price trends, it is being claimed that "there was a nil or modest rise in prices of traded items, price rise was maximum in articles such as vegetables, fruits, tur, rice and sugar that are not traded".

Further, the price of wheat has been remarkably stable, despite the government lifting the ban on its futures trading since May this year. The price of sugar has risen by nearly 50% since sugar futures were banned in May, on the face of fears that speculative activity was behind price rise.

CP Chandrasekhar and Jayati Ghosh draw attention to the sharp spikes in commodity (both foodgrains and cash crops) prices since second half of 2007 and early 2008 and the absence of any satisfactory enough demand-side explanation for such price increases to lay the blame on the doors of speculative activity triggered off by the flood of capital into deregulated exchange-traded futures and over-the-counter forward markets. See also this on the pronounced impact of global foodgrain price volatility on developing countries.

The arguement of Chandrasekhar and Ghosh rests on the claim that foodgrain prices have been experiencing larger than normal volatility in the last few years, as these graphics indicate

However, this inflation adjusted long-term graphic of foodgrain prices appears to indicate that the inflexion of 2007-08 may not be as large an outlier as is being made out ...

... and this graph of annual international price indexes for food and energy raw materials, 1960 to 2007 (2000 = 100)

However, it cannot be denied that speculative activity may have had atleast some effect on sugar prices, by way of the impact of futures price signals on wholesale market prices (and then transmitted down to the retail market). The true extent of this impact can be gleaned only by closely comparing and examining the spot prices with the prices of sugar futures (not able to lay hands on data). But given the imperfections in the transmission of such signals here, it may only have been a minor contributory factor towards the rises in prices.

Further, see also this, this, and this examination of the reasons for the commodity price increases. Also this Vox article which feels that the food price volatility wll persist.

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