I posted earlier this week about speculation on food markets by linking to a post on another blog which discussed how speculation and arbitrage may help enhance food security.
In response to my post on speculation, Ed Carr — whose new book just came out this week; I am looking forward to blogging about it in the next few weeks — wrote a post in which he discussed the convergence between the quantitative findings discussed in my paper with Chris Barrett and David Just on food price volatility and his own qualitative findings.
Commenting the empirical finding that price volatility hurts the wealthiest 40 percent of households but benefits the poorest of the poor in our paper on the welfare impacts of food price volatility, Ed writes:
“I would bet my house that the upper 40 percent of the population is that segment of the population living in urban areas and/or wealthy enough to be purchasing large amounts of processed food.”
To which I say, tongue in cheek: “Hand over the keys to my new vacation home in South Carolina, Ed.”
Joking apart, the upper 40 percent of the income distribution in our data are all rural households (we use four rounds of the publicly available Ethiopian Rural Household Survey data), and they are still pretty poor. Contrary to Ed’s conjecture, these households tend to be hurt by price volatility because they are producers and therefore net sellers of most of (if not all) the seven commodities retained for analysis (i.e., coffee, maize, beans, wheat, teff, barley, sorghum).
This is a counterintuitive result, but it makes sense, both theoretically and intuitively. Sandmo’s (1971) classic results states that when producers face uncertainty over the price at which they will be able to sell their output once it is produced, they will underproduce in an effort to hedge against price uncertainty.
But price uncertainty is precisely what we mean by price volatility, and I think Ed may have mistaken rising food prices for food price volatility since his reasoning corresponds to what we know about the welfare impacts of rising food prices. I am putting the more detailed (and lengthy) argument under the fold.