Researchers Link Ethanol Production and Financial Speculation to Rising Food Prices

A recent scientific paper, from the New England Complex Systems Institute (NECSI) attributes the increase in food prices in 2007/2008 and 2010/2011 to ethanol and financial speculation. As the authors of the paper put it, "The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion."

Fast Company points out that it is easy to see the link between increased ethanol production and the rise in food prices, but harder to see the link with financial speculation. For that reason, the NECSI researchers created a model that "includes investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns."

"This analysis," the paper concludes, "connects the bursting of the US real estate market bubble and the financial crisis of 2007-2008 to the global food price increases."

"Rapid action is needed to reduce the impacts of the price increases on global hunger," the paper states. The paper recommends both decreasing ethanol production and improving financial regulation to drive food prices down. "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," the paper states. "Rapid action is needed to reduce the impacts of the price increases on global hunger."

"A concern for the distress of vulnerable populations around the world requires actions either of policymakers or directly of the public and other social and economic institutions," according to the paper.

"There is a moral imperative here," said Yaneer Bar-Yam, one of the paper’s authors and the president of NECSI. "And from an economic standpoint, efficient allocation and optimality are desirable things."

"That regulation had limited the ability of investors to invest beyond a certain amount," said Bar-Yam. "Its repeal enabled the index funds, which in turn opened the door to people who were not in the agricultural investment business to go into the commodities markets of corn, wheat, and so on."

Bar-Yam added, "If you look at our figures, you’ll see there’s a huge difference between the futures price or the spot price and what should be the equilibrium one."

The model created by the NESCI researchers "highlights the perverse impact that commodity market deregulation and subsidies for bio-fuel production have had on the global food economy," according to Peter Timmer, Cabot Professor of Development Studies emeritus at Harvard University. Timmer says that "fixing these problems will be very difficult because of the substantial vested interests now represented in both areas."

Photo: Flickr user, Chicken Farmers of Canada