Q. How significant was the recent spike in grain prices, in terms of the magnitude of the price rises and range of crops affected?
A. In terms of the range of crops affected, it’s not as broad or dramatic as the 2007/2008 event and it’s certainly not as broad or dramatic as the commodity price spikes of the 1970s, which remain my reference point when it comes to market volatility.
There was a brief spike in grain prices in 1995/1996, less sudden or dramatic than the wheat spike this time, but it involved more than wheat. So I don’t think that this event is likely to be a memorable one in the fullness of time.
Q. So the spike was the result of short-term factors – the drought problems in Russia and surrounding countries?
A. Yes, plus fresh memories of the 2008 spikes and, in particular, of the export bans imposed at that time: increased export taxes on wheat by Argentina; export bans in rice markets by India, for everything but basmati rice, Indonesia, Vietnam, and Egypt; increased export taxes on rice and grains by the Chinese. There was a confluence of export restrictions in 2008 that explain the amplitude of those price spikes.
So when the weather started to deteriorate in Russia, importers began to anticipate a Russian export ban and accelerated their purchases to get what they could, while it was still available. That became self-fulfilling – it drove up the price and eventually forced the Russians to impose an export ban, pushing the price up still further. So the self-
fulfilling anticipation of export bans is a new element in the mix that produced the dramatic events of 2008, and led to the less-traumatic – but still prominent – aftershock of 2010 in wheat markets.
Q. Has speculation been a contributory factor this time?
A. It’s always been plausible to me that – whether you call them speculators or not – new investors in commodities markets in 2007 and 2008 helped drive the price up. People didn’t know where to put their money. The real estate market had collapsed in the United States and equities markets were moving downward. So the equities bubble had burst, the real estate bubble had burst – what’s an investor to do? They moved into commodities, all at the same time. That helped push up commodities prices.
And not just food prices – in 2008, the price of metals was going up, the price of petroleum was going up.
Food commodities prices did not increase as fast as the prices of fuels. So that was an economy-wide commodity price boom that it’s plausible to me was fuelled by the entry of new investors into commodities funds and commodities markets. I don’t know whether you’d call it speculation or not.
This time, the memory of that spike in 2008 led some commodity purchasing firms – food companies – to use the futures market to protect themselves. They took positions in futures markets when the price was dipping last spring, and they are now safe. So the futures markets when used properly aren’t speculation – it’s hedging, it’s insurance, it’s reducing risk. I don’t want to beat up on the futures markets too much. (article continues below)
Q. Who is on the other side of those trades? Is it the grain producers or is it people taking a speculative position?
A. It’s both. But I emphasise the trade interventions. And these were also double-edged – trade interventions destabilise international prices but they stabilise domestic prices for the countries that impose the bans.
We shouldn’t equate instability in international markets with global price volatility. The international market for some commodities like rice is very thin – only 5% or 6% of world rice consumption is satisfied through international trade. So when the export price of rice triples, it’s not the same thing as saying all domestic rice consumers around the world are facing higher prices. Many in China, in 2008, scarcely saw the price of rice go up at all.
So throwing around the word “global” is a careless habit that disguises the segmentation and separation of markets. The international market is highly volatile but it’s that way, in part, because so many domestic markets are artificially stabilised by trade interventions.
Q. Do you expect to see a continuation of exporting countries seeking to protect their domestic markets?
A. Yes, because exporters got away with it in 2008. Once the export bans begin, pushing international prices higher, it requires exceptional discipline to leave your market open to more sales. Your domestic prices are going to go even higher.
Some exporters did show restraint in 2008: Thailand never shut down its rice exports, and the United States never shut down, even though in the United States there was panic-buying. And our wheat market was left open in 2008 even though millers and bakers were begging the government to put restraints on exports. The US government never did that, I think fortunately.
Q. With the continuation of protectionism, do you expect to see price spikes occur more frequently?
A. No. I’d say we are still dealing with the psychological aftershock of 2008, and – assuming there’s not a harvest disaster in Australia or something like that – wheat prices will tend to go down again, and the markets will realise that there was a bit of a panic and a lot of people paid too much for wheat in July. There will be less of a panic next time.
The United States has plenty of wheat to export – US wheat stocks are at a 23-year high – and when the Russians see all of their hard-won markets in North Africa and the Arab world buying from the Americans and the French, they will have remorse about the export ban.
There’s already some speculation that they’ll lift it ahead of schedule. Maybe I’m being optimistic but I don’t think these events are game-changers – they’re more an aftershock of 2008 than they are an omen of what’s to come.