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Speculation and Arbitrage on Food Markets

Last updated on May 28, 2011

Matt Collin over at Aid Thoughts has a really good post quoting Tim Worstall about arbitrage on food markets:

“OK, so there’s going to be a future shortage of food. That will mean that in the future some people will die from starvation. This is not a desirable outcome.

So, what do we want to happen? We want to pull those future high food prices into the present. Instead of finding out that we’re short 10 million tonnes of grain in 2012 (or 1 million in 2015, or 100 million, whatever and whenever) we’d like people to be aware of this future food shortage. And getting lots of people to do two things.

1) Among consumers, we want people to substitute away from the foods that will be in short supply. Eat potatoes, or polenta, instead of bread or pasta. Cassava instead of rice. We also want people to be a bit more careful about the food they buy: not waste so much of it. A high price now does this.

2) We want farmers to plant more land, also to farm more intensively so they get a larger crop from each acre they do plant. A bit more weeding, a tad more fertilser, this sort of thing. A high price now makes this happen.

So, we want high prices now to reduce consumption and increase production so that we don’t in fact run out of food in the future.

So that people don’t starve to death, right?”

Unfortunately, one of the commenters on the post linked above, who writes under the name Liam, is completely mistaken about the impact of food price volatility when he writes:

“A key question with speculation has to be its affect on volatility. In terms of food prices, volatility is I think the thing everyone can agree on is bad (since both high and low food prices are good for some people).”

I interpret this as a sign that policy makers and the general public are ready for our findings on food price volatility.

(HT: Ryan Briggs via Twitter.)