Thursday, August 9, 2012

A Dangerous Way To Test A Theory

Don't think for a minute that I think the folks over at NECSI (The New England Complex Systems Institute, about whom I've written before) are tenting their fingers and cackling in a Mr. Burns-like way while they manipulate the world's food markets in order to test their theory of food price spikes and social unrest. Rather, it is the rest of us who have embarked on the testing program. The researchers at NECSI have been modelling food prices, ethanol production and the effect of speculative money on the international food system. In their model, once the FAO (Food and Agricultural Organization) food price index hits about 215 (or 190 adjusted for inflation), all hell breaks loose. Food prices have been advanced as the most reasonable explanation why, for instance, unrest in the Middle East went so quickly from regional to widespread, birthing what we now know as the Arab Spring. And the Arab Spring followed one of these price spikes. And it makes sense. Bread riots are a recurring theme throughout history. Hunger is a strong motivating force.

FAO Price Index at current prices (black curve) and corrected for inflation (blue curve) between January 2004 and May 2011. Red dashed lines signify the beginning dates of food riots and unrest in North Africa and the Middle East. Black and blue horizontal lines represent the current-price and inflation-adjusted food price thresholds for riots. Bar-Yam et al/arXiv
 
And the researchers at NECSI, following their noses, noted last year that world food prices were going up (driven by corn-to-fuel programs in the US, but even more so by speculative money), and the food price index looked like it would peak above the magic 215 again in 2012. And then climate change kicked in and drought spread across North America. Big money has already bid prices up, driving another speculative bubble in food. To quote from the NECSI press release:
The worst drought in the American Midwest and the highest temperatures in a half-century are poised to trigger an imminent global food crisis, scientists at the New England Complex Systems Institute said Monday. NECSI has warned for months that misguided food-to-ethanol conversion programs and rampant commodity speculation have created a food price bubble, leading to an inevitable spike in prices by 2013. Now it appears the "crop shock" will arrive even sooner due to drought, unless measures to curb ethanol production and rein in speculators are adopted immediately.
FPI over time From the NECSI website

 Canada and the US are probably going to be relatively insulated from the worst effects. We'll see a rise in food prices of, well, 4% or so is being bandied about. But if the markets actually do get crazy, this will probably rise significantly. Spending more on food is not the worst thing that could happen to us—North America has some of the lowest food prices ever in the history of civilization. But taking money out of discretionary spending and putting it toward food will push us closer to a full-on depression and the potential for major social unrest. It is interesting to me that in all the coverage that the current NA drought is getting, the risk to, and effect on, food prices from speculation has been pretty much ignored. Yet, as NECSI research has shown, “while the behavior [of the food price index] could not be explained by supply and demand economics, it could be parsimoniously and accurately described by a model which included both the conversion of corn into ethanol and speculator trend following.” Like the idea of serious banking reform after the appalling criminality of the past decade among the international banks (as I write this Standard Chartered is taking a hammering after the New York state regulator accused the U.K. bank of being involved in laundering money for Iran), reining in speculation in the international food market has been deemed “off the table” apparently. We are facing a bleak future in which billions of us will starve to death, not because there isn't enough to eat, but rather because of the imperative to maximize profit. We've seen this before: in Ireland during the Great Famine, there was always food in the markets, there just wasn't any money for the poor to buy it. And in many famines since the 1950s, food aid has been used as a way to dump excess production and often to destroy local food production and distribution networks to allow foreign companies into the market (this would be one of the major reasons behind the homogenization of world food culture). So once again we will see why forgoing food sovereignty for reliance in imported foodstuffs is historically a very bad idea. And the message will be delivered on the baked bread scent on the breath of the starving.

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