Households in the UK, like many other countries, struggle to make ends meet. According to supermarket chain Asda, more than half of households have just £2.66 a week left after bills and essentials are paid.
This shift is primarily to blame for the energy and food price spikes we've seen this year. According to the Office for National Statistics, the prices of staples have risen by an average of 17% compared to last year, while the prices of some products, such as pasta, have risen by as much as 60%. This is because the cost of staple food crops such as wheat has increased by more than 30% since the start of 2021.
The reasons for this surge in prices are many: Russia's war with Ukraine (a significant wheat exporter), the impact of extreme weather conditions on crops, and bottlenecks in pandemic-era supply chains that are still being felt due to ongoing lockdowns, labor shortages, and a loss of capacity by producers.
But these supply factors need to explain the recent price movement fully. China has reported bumper grain harvests in 2021 and the US in 2022, while the Food and Agriculture Organization of the United Nations (FAO) predicts a "supply convenience" for grain in 2022–23. This doubts whether the rise in food prices can be explained solely by supply shortages.
When the world last experienced a major food crisis in 2008, financial speculation in food derivatives was considered one of the contributing factors. Indeed, my research on this food crisis shows that the world is more likely to be in a food price crisis than a food supply crisis.
The role of speculators
While this can encourage speculation, commodity exchanges help physical food producers, consumers, and traders manage risk. For example, a farmer may enter a short position (essentially betting that prices will fall) in the price of wheat through a contract that is expiring (or nearing harvest time). If prices fall while the crop grows, the contract becomes more expensive and compensates the farmer if the crop is worth less. It's like an insurance policy that allows the farmer to plan during planting time.
However, for risk management to work, the physical price of the commodity must match the futures price. To ensure this close relationship, the price of a material contract is based on the price of a particular futures contract. For example, a futures contract for Brent crude traded on the Intercontinental Exchange is a generally accepted benchmark for a specific type of oil. World food prices are similarly determined in financial futures markets.
The use of benchmarks is often justified by the claim that financial markets are good at "price discovery"—determining the current value of a product. The "efficient market paradigm" states that all information about the underlying principles of the market, that is, physical demand and supply conditions, is reflected in the futures price.
Comments