Food Prices to Double by 2030?

From the Guardian:

“The average price of staple foods will more than double in the next 20 years, leading to an unprecedented reversal in human development, Oxfam has warned. (…)

Research to be published on Wednesday forecasts international prices of staples such as maize could rise by as much as 180 percent by 2030, with half of that rise due to the impacts of climate change.

After decades of steady decline in the number of hungry people around the world, the numbers are rapidly increasing as demand outpaces food production. The average growth rate in agricultural yields has almost halved since 1990 and is set to decline to a fraction of 1 percent in the next decade.”

I have not read Oxfam’s report, but I am very skeptical.

If there is one thing I remember from the time series econometrics course I took in graduate school, it is that the further in the future a given forecast, the wronger it is.

This means that you can be reasonably confident in a forecast if it’s two or three time periods (e.g., months for monthly data, years for annual data) in the future. For anything beyond five time periods, however, you are in the dark. In other words, the further into the future you try to forecast, the likelier you are to be wrong.

If Oxfam has been using the same monthly food data I have been using — annual data would mask a considerable amount of heterogeneity; in 2010 alone, food prices have increased by 23 percent — they are forecasting food prices about 228 months into the future. Even using annual data, Oxfam forecasting food prices in 19 years makes for what I would charitably call a very heroic forecast. There are about a dozen more reasons why I think Oxfam’s forecast is wrong, which I might get into if there is a demand for it.

But if you truly believe food prices will have doubled by 2030, there’s a derivative contract I might like to sell you…

5 comments

  1. Pingback: Food prices and reliable predictions « Aid Thoughts
  2. MJ

    Doubling in 20 years’ time implies an annual inflation rate of 3.5%. Assuming the derivative contract is priced in today’s money, you might not be on to such a good deal!

    Equally, of course, if we do believe in the fundamentals behind Oxfam’s claims, then the derivatives market ought to be a good way of pricing them in. Which, in theory, ought to support the necessary investment to increase production, but this doesn’t seem to happen in poor countries.

    See http://bottomupthinking.wordpress.com/2011/05/30/blame-it-on-the-speculators-why-dont-you/ for more ill-informed recent musings on this.

  3. Marc F. Bellemare

    Thanks for your comment, MJ. I should have added somewhere in there that I am talking in terms of real (not nominal) prices. I presume Oxfam is as well, given that the FAO’s food price statistics are in real terms.

  4. MJ

    I assumed Oxfam were too. But I was under the impression that derivative contracts were not generally index linked so as to follow real prices, though, of course, few derivative contracts will have a strike date of 20 years’ time!

  5. Pingback: Food Prices: Data and Forecast in The Guardian « Marc F. Bellemare