August 10, 2010
World Bank re-examines commodity boom
Published in Stock & Land
THE effect biofuels have on food prices is not as large as originally thought; instead, financial investors' use of commodities - also known as the "financialisation" of commodities - may have been partly responsible for the 2007-08 spike in food prices, according to a recently released working paper from World Bank.
The new report is an about-face in position compared to World Bank's 2008 report that blamed biofuels for 70 to 75 per cent of the commodity price spike.
John Baffes and Tassos Haniotis, authors of "Placing the 2006/08 Commodity Price Boom into Perspective," argued that energy prices and commodity speculation played significant roles in the price spikes of non-energy commodities seen a few years ago (Figure).
"We conclude that a stronger link between energy and non-energy commodity prices is likely to have been the dominant influence on developments in commodity - and especially food - markets," they wrote.
"Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices."
The report also comes to some interesting conclusions about the role energy prices and speculation played in commodity prices, suggesting that fiscal expansion in many countries and lax monetary policy created an environment that favored high commodity prices.
"The depreciation of the US dollar - the currency of choice for most international commodity transactions - strengthened demand (and limited supply) from non-US commodity consumers (and producers)," the report notes.
"Other important contributing factors include low past investment, especially in extractive commodities; investment fund activity by financial institutions that chose to include commodities in their portfolios, and geopolitical concerns, especially in energy markets."
The authors added that index fund activity - one type of speculative activity - played a key role during the 2008 price hike.
"Our results also show that agricultural commodity market fundamentals appear, in the short term, to be playing somewhat less of a role than in the past, tending to be overshadowed by the much stronger pull of energy prices," they wrote.
Role of biofuels
Baffes and Haniotis concluded it was unlikely biofuels played a significant role in the commodity price spikes because biofuels did not represent a large percentage of worldwide grain and oilseed use.
The authors pointed out that globally, biofuels accounted for only about 1.5pc of the area planted to grains and oilseeds.
"This raises serious doubts about claims that biofuels account for a big shift in global demand," they said.
"Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in US ethanol production, and oilseed prices dropped when the (European Union) impressively increased its use of biodiesel.
"On the other hand, prices spiked while ethanol use was slowing down in the US and biodiesel use was stabilizing in the EU."
The biofuel industry was quick to praise the report, applauding World Bank for "setting the record straight" on biofuels' effect on world food prices.
Growth Energy chief executive officer Tom Buis said the report has "dispelled the myths and lies perpetuated by those who tried to say there was a 'food-versus-fuel' issue. This study clearly shows that the notion of food-versus-fuel was simply wrong."
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