http://SBC.com/foodvideos.html.
These videos illustrate the correlation between
increasing costs of food and worldwide food riots,
especially from 2000 until the present day. Both
prices and riots peaked in 2008 and 2011 after a
brief drop in 2009. This month, NECSI is publishing
the results of its food prices update, in which the
institute extends its food price model to January
2012, entering no modifications to the model and
continuing to use its dynamics.
“The food price bubble of 2011 caused widespread
hunger and helped trigger the Arab spring. In 2013
we expect prices to be even higher and may lead to
major social disruptions.” said Professor Yaneer Bar-
Yam President of NECSI, who has just returned from
the World Economic Forum in Davos, Switzerland
where he presented his findings on speculation in
global commodity markets. His paper “The Food
Crises: A Quantitative Model of Food Prices Including
Speculators and Ethanol Conversion” was called one
of the top 10 discoveries in science of 2011 by Wired
magazine.
According to the new study, the next food price peak
will take place in about a year. The results will be
dramatically higher prices than we have encountered
thus far. The study warns that should ethanol
production continue to grow according to multiyear
trends, even this underlying trend will reach social-
crisis levels in just one year.
NECSI’s latest findings reveal that the model from
their 2011 paper still fits food price price trends.
Their update reveals one important shift, however, in
price trends, which might add to, not reduce, global
instability. “The current trend of prices suggests that
in the immediate future market prices may become
lower than equilibrium,” says the study, “consistent
with bubble and crash market oscillations.” The next
bubble is expected by the end of 2012.
NECSI’s researchers said the model they have used to
examine food prices has proven to be robust and
consistent with ongoing behavior of food prices. Bar-
Yam, who co-authored last year’s food-price study as
well as the latest study update, said that the fit with
the FAO Food Price Index is still “strikingly
quantitatively accurate, validating both the descriptive
and predictive abilities of the model.
”To extend NECSI’s earlier model ten months out and
still witness a fit is important,” he added. “This means
we have validated it for data that was not around
when we first made the model. It predicted the burst
of the 2011 food bubble at the exact time it
happened, when many were saying that high food
prices were there to stay. Success in predictive
validation is remarkable. The conclusions are
reinforced greatly that high food prices are due to
ethanol and speculators–with all the relevant policy
implications.”
“The current equilibrium value is about 50% higher
than the prices prior to the impact of the ethanol
shock. And the projected time until the next food
price bubble is about a year.” The results will be
dramatically higher prices than encountered thus far.
As I commented before the Arab Spring:
The rise in food and energy prices should be taken
into consideration by government officials conducting
pro-inflationary policies. What should be of concern
regarding commodity price inflation is how it
represents a regressive tax on lower income workers
and consumers in emerging markets and developing
countries. Lower income consumers spend a much
greater percentage of income on food and energy. So
when commodity prices increase, it has a
disproportionate effect on them. One reason we saw
food riots in emerging markets in 2008 has much to
do with this.
-On Food Price Inflation, Nov 2010
I don’t think things are any different now. I should
add that emerging markets central banks were
pushed to tighten in 2010 because of rising food
prices and this has created a negative growth
dynamic in countries like Brazil and India as high
interest rates have combined with inflation to
suppress demand growth. In Brazil’s case, the
currency has also created even more problems.
If the NECSI’s models have any predictive value, policy
makers in the developed economies addicted to easy
money to cure the indebtedness in the private sector
should take note because their policies can have
unintended consequences as negative real yields bite
and private portfolio preferences shift and drive up
commodity prices.
As NECSI puts it in:
Our analysis shows that dominant causes of price
increases are investor speculation and corn to ethanol
conversion. Models that just treat supply and demand
are not consistent with the actual price dynamics. The
two sharp peaks in 2007/2008 and 2010/2011 are
specifically due to investor speculation, while an
underlying upward trend is due to increasing demand
from ethanol conversion. The model includes investor
trend following, as well as shifting assets between
commodities, equities and bonds to take advantage
of increased expected returns.
Source: UPDATE 2012 — The Food Crisis: Predictive
Validation of a Quantitative Model of Food Prices
Including Speculation and Ethanol Conversion
These videos illustrate the correlation between
increasing costs of food and worldwide food riots,
especially from 2000 until the present day. Both
prices and riots peaked in 2008 and 2011 after a
brief drop in 2009. This month, NECSI is publishing
the results of its food prices update, in which the
institute extends its food price model to January
2012, entering no modifications to the model and
continuing to use its dynamics.
“The food price bubble of 2011 caused widespread
hunger and helped trigger the Arab spring. In 2013
we expect prices to be even higher and may lead to
major social disruptions.” said Professor Yaneer Bar-
Yam President of NECSI, who has just returned from
the World Economic Forum in Davos, Switzerland
where he presented his findings on speculation in
global commodity markets. His paper “The Food
Crises: A Quantitative Model of Food Prices Including
Speculators and Ethanol Conversion” was called one
of the top 10 discoveries in science of 2011 by Wired
magazine.
According to the new study, the next food price peak
will take place in about a year. The results will be
dramatically higher prices than we have encountered
thus far. The study warns that should ethanol
production continue to grow according to multiyear
trends, even this underlying trend will reach social-
crisis levels in just one year.
NECSI’s latest findings reveal that the model from
their 2011 paper still fits food price price trends.
Their update reveals one important shift, however, in
price trends, which might add to, not reduce, global
instability. “The current trend of prices suggests that
in the immediate future market prices may become
lower than equilibrium,” says the study, “consistent
with bubble and crash market oscillations.” The next
bubble is expected by the end of 2012.
NECSI’s researchers said the model they have used to
examine food prices has proven to be robust and
consistent with ongoing behavior of food prices. Bar-
Yam, who co-authored last year’s food-price study as
well as the latest study update, said that the fit with
the FAO Food Price Index is still “strikingly
quantitatively accurate, validating both the descriptive
and predictive abilities of the model.
”To extend NECSI’s earlier model ten months out and
still witness a fit is important,” he added. “This means
we have validated it for data that was not around
when we first made the model. It predicted the burst
of the 2011 food bubble at the exact time it
happened, when many were saying that high food
prices were there to stay. Success in predictive
validation is remarkable. The conclusions are
reinforced greatly that high food prices are due to
ethanol and speculators–with all the relevant policy
implications.”
“The current equilibrium value is about 50% higher
than the prices prior to the impact of the ethanol
shock. And the projected time until the next food
price bubble is about a year.” The results will be
dramatically higher prices than encountered thus far.
As I commented before the Arab Spring:
The rise in food and energy prices should be taken
into consideration by government officials conducting
pro-inflationary policies. What should be of concern
regarding commodity price inflation is how it
represents a regressive tax on lower income workers
and consumers in emerging markets and developing
countries. Lower income consumers spend a much
greater percentage of income on food and energy. So
when commodity prices increase, it has a
disproportionate effect on them. One reason we saw
food riots in emerging markets in 2008 has much to
do with this.
-On Food Price Inflation, Nov 2010
I don’t think things are any different now. I should
add that emerging markets central banks were
pushed to tighten in 2010 because of rising food
prices and this has created a negative growth
dynamic in countries like Brazil and India as high
interest rates have combined with inflation to
suppress demand growth. In Brazil’s case, the
currency has also created even more problems.
If the NECSI’s models have any predictive value, policy
makers in the developed economies addicted to easy
money to cure the indebtedness in the private sector
should take note because their policies can have
unintended consequences as negative real yields bite
and private portfolio preferences shift and drive up
commodity prices.
As NECSI puts it in:
Our analysis shows that dominant causes of price
increases are investor speculation and corn to ethanol
conversion. Models that just treat supply and demand
are not consistent with the actual price dynamics. The
two sharp peaks in 2007/2008 and 2010/2011 are
specifically due to investor speculation, while an
underlying upward trend is due to increasing demand
from ethanol conversion. The model includes investor
trend following, as well as shifting assets between
commodities, equities and bonds to take advantage
of increased expected returns.
Source: UPDATE 2012 — The Food Crisis: Predictive
Validation of a Quantitative Model of Food Prices
Including Speculation and Ethanol Conversion