Supply shocks cause price shocks: how commodities policy can address the issue

If one wants to improve global food security in a sustainable manner, one needs an appropriate diagnosis of the food crises of 2008 and 2011. The popular diagnosis that futures market operations by index funds were responsible for catastrophic price increases is – to the best of our knowledge – wrong. Instead, the dramatic price increases experienced in recent years were caused by shocks and structural developments in the real economy and intensified by political coordination failures.”

Thus reads the main conclusion of Hungermakers? – Why futures markets activities by index funds are promoting the common good, a report recently published by four German researchers from Martin-Luther University of Halle-Wittenberg and the Leibniz Institute for Agricultural Development in Central and Eastern Europe in Halle*. Some observations included in this report are very instructive: for instance, when people claim with alarm that wheat (CBOT) prices increased by 159% between January 2006 and April 2008 because index funds were strongly engaged, they should remember that in the same time rice prices increased by 168% − and that index funds are not involved in rice markets.

The authors consider a future where world population is projected to be about 9.3 billion in 2050. In addition to demand for fruits and cereals, the consumption of meat will increase, boosting the demand for agricultural commodities, especially animal feed. The researchers list three policy recommendations:

  • Sustainably increasing the production of agricultural commodities through research funding, know-how transfers and more investment, both private and public;
  • Prevention of government policies that are detrimental to markets, such as protectionist policies (export bans) and the subsidisation of bio-energy (the report shows how the use of croplands for subsidised biofuels led to a dramatic decline in stocks of wheat, rice, soya and corn from 2002 to 2008);
  • Appropriate regulation of commodity futures markets. The European Market Infrastructure Regulation (EMIR) will increase information efficiency of the futures markets, the authors say, but the application of strict position limits under MiFID or ban of index funds from the agricultural futures markets would impair the functionality of agricultural markets. The authors conclude that “Governments should avoid such mistakes in the interest of the hungry”.

This study illustrates that policymakers need to consider whether financial investors are not only not detrimental to food security, but in fact serve as a cornerstone of coordinated efforts to meet the world’s future needs.  In the professors’ own words, “Global food security will not be improved by introducing entry barriers for futures markets.”


* Prof. Dr. Ingo Pies and Matthias Georg Will from Martin-Luther University of Halle-Wittenberg and Prof. Dr. Sören Prehn and Thomas Glauben from the Leibniz Institut für Agrarentwicklung in Mittel und Osteuropa (Agricultural Development in Central and Eastern Europe) of Halle.


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