Knowledge as a first step towards less volatile markets

Knowledge as a first step towards less volatile markets

David LabordeSenior Research Fellow

Markets Trade and Institutions divisionInternational Food Policy Research Institute

Panel discussion “Rising global food prices: Causes, Impacts, and Response Strategies”

Dakar, May 17, 2011

David Laborde, May 2011

A global public goods story

Reducing price instability is a global public good• Benefits consumers and producers• On the short run and the long run (less risk = more investment)

As any public good, how to provide it? Who is going to pay for it? Global Governance

Do we need policies? • Yes, if they are supported by scientific evidences• Promote the few good ones, deter the others

Role of knowledge to • Target and reduce market imperfections (e.g. asymmetry of

information)• Provide right signal to policy makers• Build the global governance and promote enlightened negotiations

(e.g. trade rules)Information and a safe and fair trading system are global public goods too!


New York Times "No Wheat Shortage, but Prices May Rise"

Financial TimesRussia grain export ban sparks price fearsPublished: August 5 2010 10:50

Voice of America "Wheat Prices Soar after Russia Bans Exports"

WSJWheat Prices Hit 2-Year Highs Following Russian Ban Aug 5, 2010

Economic Times (India) "Russian Crisis Won’t Impact Global Wheat Supplies, Prices"

The Diane Rehm Show (USA) "World Wheat Supplies"

Radio France Internationale, English to Africa service "Russia Wheat Ban Raises Food Security Fears"

Radio France Internationale, Latin America Service

Asia Sentinel "Is Another Food Crisis Coming?"

BBC World News America "From Farmers to Bakers: What the Wheat Shortfall Means“

Financial TimesProspect of Russian grain imports lifts wheat Published: August 19 20

BloombergWheat Prices Jump Most in Week as Argentina, Russia Crops Hurt by Drought

Public Good #1Relevant and accurate Information


CBOT wheat prices

From Torero 2011


CBOT wheat prices

From Torero 2011

Promote transparency


CBOT wheat prices – IFPRI model to detect abnormal spikes

Drought in Russia began

+Locus in Australia

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

12/1

0/20

01

5/7/

2002

9/27

/200

2

2/24

/200

3

7/17

/200

3

12/8

/200

3

5/3/

2004

9/24

/200

4

2/17

/200

5

7/13

/200

5

12/2

/200

5

4/28

/200

6

9/20

/200

6

2/14

/200

7

7/10

/200

7

11/2

9/20

07

4/24

/200

8

9/16

/200

8

2/9/

2009

7/2/

2009

11/2

3/20

09

4/20

/201

0

Realized Return

95th percentile

Source, Martins-Filho, Torero, Yao (2010)

95th Percentile

Abnormalities

Define and Detect Volatility


Public Good #2Global Governance for a fair and

stable trade system


Distorted markets: Side effects of subsidies

RICE

25%

13%

11%

11%

11%

29%

WheatUnited StatesCanadaAustraliaRussian FederationFranceRest of the world

• Agricultural markets are highly concentrated (Number of exporters, Number of commodities)= High Risk Exposure

• Trade should lead to specialization BUT

Very high level of distortions

Reduce existing distortions: Production and Export subsidiesPromote Aid For Trade measures to help new exports to step in

See: - Laborde and

Bouet 2010, 2011

- Orden et al 2011


Governments try to insulate their domestic markets from the world market in period of crisis.

Reduction in tariffs, Increase in export restrictions when price go up.

Large economies policies have a high cost for small countries

Global trade system has to be protected at all cost for ensuring that trade plays is role in the food security strategy

Unstable Trade policies

Wheat World Price

1 – A “Natural” Shock 11%2 – A “Natural” Shock with exporter policy reaction 17%

3 – A “Natural” Shock with exporter and importer policy reaction

21%

West Africa , wheat shock Real income

1 – A “Natural” Shock -0.04%2 – A “Natural” Shock with exporter policy reaction -0.07%

3 – A “Natural” Shock with exporter and importer policy reaction

-0.08%

Source: Bouet and Laborde 2009

Promote global governance rules (e.g. WTO Doha Round) that limits exports and imports restrictionsDelicate trade-off between country sovereignty and a “one” world visionRole of Regional Integration


Explosion of biofuel production and consumption

Effects on Food/Feed prices and their volatility

All Biofuels are not equals (e.g. ethanol less strong effects on food prices than biodiesel)

Large distortions: protection, subsidies, mandates

A collection of bad policies that create negative externalities for Food/Feed consumers without maximizing environmental gains

See Al Riffai, Laborde and Dimaranan 2010, Laborde 2011

New domestic policies = New externalities

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0

200

400

600

800

1000

1200

1400

Ethanol ConsumptionParaguay Virgin Islands, British Australia India Colombia

Thailand Canada China EU27 United States

Brazil

Thd

s ba

rrel

per

day

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

50

100

150

200

250

300

350

Consumption biodieselCanada Australia Norway Belarus Korea, SouthColombia China Thailand Brazil United StatesEU27

thds

bar

rels

per

day

Liberalize trade in Biofuels and its feedstocks to avoid concentration on food/feed related products

Bring more flexibilies in existing policies: eliminate mandates on biofuels and remove subsidies


IFPRI as a knowledge broker with African partners

A long partnership

New channels:

www.foodsecurityportal.org

New opportunities:• The AGRODEP project as a support to CAADP• Next workshop in June in Dakar with sessions

on methodologies to address Food prices.

Knowledge as a first step towards less volatile markets

Economy & Finance

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