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Improved knowledge for reducing world price volatility
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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!
David Laborde, May 2011
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
David Laborde, May 2011
CBOT wheat prices
Page 4
From Torero 2011
David Laborde, May 2011
CBOT wheat prices
Page 5
From Torero 2011
Promote transparency
David Laborde, May 2011
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)
Page 6
95th Percentile
Abnormalities
Define and Detect Volatility
David Laborde, May 2011
Public Good #2Global Governance for a fair and
stable trade system
David Laborde, May 2011
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
David Laborde, May 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
David Laborde, May 2011
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
David Laborde, May 2011
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.