BioFuels Journal

Cambridge, MA—A paper on the surge in world food prices is calling on private and public policy makers to recognize the serious impact that price spikes in food bring to the world′s most vulnerable populations.

The paper, "The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion," was prepared by the New England Complex Systems Institute in a study partly funded by the U.S. Army.

The surge in food prices has been frequently linked to numerous factors, while this study maintains two specific reasons account for the price increases.

The authors slam and analyze the two culprits -- speculators playing in the commodities markets and corn-to-ethanol conversion.

The authors refer to "since-debunked claims of the role of ethanol conversion in energy security and the environment."

They say a significant decrease in the conversion of corn to ethanol is warranted.

Using direct tests and statistical analysis, the paper pinpoints what is going on in global food pricing today.

The authors discuss the motivations, techniques, and impact of commodity speculation, weather, development, and additional factors that are rounding out the pricing puzzle -- exchange rates and energy costs.

The authors are Marco Lagi, Karla Bertrand, Yavni Bar-Yam, and Yaneer Bar-Yam.

"The immediate implications of our analysis are policy recommendations for changes in regulations of commodity markets and ethanol production," the authors state.

A list of topics / talking points:

• A model of speculators and ethanol conversion matching price data (Fig. 1)

• Market dislocation due to speculation is manifest in higher inventories with higher prices. Global inventories of grain rise one year after price bubble when higher priced contracts affect grain delivery (Fig. 2)

• Speculators: an explicit model for the first time, showing bubble/crash dynamics (see figures 8 and 10)

• Our analysis correctly estimates the duration of a bubble as about 12 months due to the planning time of companies in contracts for grain.

• Ethanol: direct match between food price growth and ethanol growth (Fig. 6)

• Failure of supply/demand model to explain price dynamics

• Oil prices do not explain food price rise (Figure 3 F shows wheat prices are high before oil prices, see also paragraph 2 on page 17).

• The link of food prices paper to revolutions in North Africa and the Middle East is made in a linked paper.

• Dominos of global dependence: the mortgage crash -> stock market crash -> commodities bubble -> social unrest, food riots and revolutions

• Economics: there is a breakdown of optimal allocation due to both regulation (in the case of ethanol subsidies) and deregulation (in the case of speculation).

Manuscript is available at: http://necsi.edu/research/social/food_prices.pdf.

For figures, click here.

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