Food Speculators Targeted

Experts are considering an international system to fight speculation in food prices, but questions persist about how coordinated grain reserves would be used.

2008-06-10
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BOSTON—As high food costs pressure Asian consumers and economies, experts are debating the value of creating new international grain reserves to keep prices in check.

In May, the Washington-based International Food Policy Research Institute (IFPRI) called for a series of measures to curb excessive speculation in commodities, which it cited as one of the causes of record-high food prices this year.

The United Nations Food and Agriculture Organization (FAO) has estimated that 862 million people are suffering from hunger and malnutrition worldwide. That number could grow by 100 million because of the price surge, according to the World Bank.

High demand and low inventories have been blamed for an 80 percent run-up in international rice prices in the first four months of this year. But IFPRI said that unrestrained trading practices have also played a significant part.

“Supply and demand fundamentals do not fully explain the recent drastic increase in food prices,” the organization said in a policy brief. “Rising expectations, speculation, hoarding and hysteria” have also driven prices to new highs.

IFPRI said that one solution would be to dampen speculation by creating “a modest grain reserve,” using a portion of the national stocks held by major grain-producing countries. Releases could then be coordinated to deal with regional emergencies or to keep prices from climbing far above market rates, it said.

Planning questions

IFPRI officials declined to discuss the plan further until details are finalized, but it appears similar to measures for stabilizing the oil market by establishing strategic petroleum reserves coordinated through the Paris-based International Energy Agency (IEA).

Record fuel prices have sparked debate about how the international system for oil should be used. Industrialized nations belonging to the IEA have largely agreed that their strategic reserves should be released onto the market only in the case of emergencies, but China has built its own reserves to help control prices as well.

International food reserves may face similar planning questions. High prices provide farmers with market incentives to produce more. But stable rises in price may be hard to distinguish from the boom-and-bust cycles caused by excessive volatility in the market.

In an interview with Radio Free Asia, Homi Kharas, senior fellow at the Washington-based Brookings Institution, said “Volatility in and of itself damages both producers and consumers.”

“So I think it does make sense to think about how to reduce some of the volatility in food markets. Whether it would target prices or whether it would target quantities—that’s a very complex issue.”

Kharas, a former World Bank chief economist for East Asia and the Pacific, said that food reserves are too costly to build up when supplies are scarce and prices are already high. Keeping food from the market now would only make matters worse.

‘Costly and vulnerable’

A second problem is waste, Kharas said. Grain reserves can be filled when prices are low, but are costly to construct and are vulnerable to spoilage and inefficiency. How to use the reserves is another question, Kharas said.

“When they are used in an effort to try to stabilize or manage prices, the results have not been very successful in the past,” Kharas said, citing past experience at the country level. And it is often a challenge to get food to the places where it is needed, even when markets are working normally, Kharas said.

Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations, said that current costs will make it hard to build up food reserves to the point where they will be effective in controlling prices.

“This is a case of a medicine that makes the disease a heck of a lot worse before it might make it better,” Mallaby said.

A second question is whether reserves should be built up or coordinated when prices come down.

“My instinct is probably not,” Mallaby said, arguing that such a system would only interfere with the worldwide market. “There’s already a hugely complex, diversified system for hedging against future price moves,” he said.

Mallaby said that problems with food are fundamentally different from problems with fuel, because there is no cartel of food producers similar to the Organization of Petroleum Exporting Countries (OPEC).

“There’s probably less of a need for a centralized, coordinated intervention on this than there is on petroleum,” Mallaby said.

“In the food market, there is no OPEC for rice or an OPEC for wheat, and therefore a kind of counter-OPEC is not called for.”

Original reporting by Michael Lelyveld. Edited for the Web by Richard Finney.

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