What’s that got to do with the price of food?

The various food price indices seem to offer a simple way to gauge the price of food. High index price means people have to pay more for food, right? And beastly speculators create price spikes, right? Up to a point, Lord Copper. I confess, I’ve been guilty of jumping to the first conclusion and of rubbishing the second. But my knowledge is third-hand at best. So I’m happy to point you to a thoughtful analysis on the always interesting Resources Research website.

Makanaka rakes over the FAO Food Price Index and the same organisation’s Agricultural Market Information System, and discovers that they paint rather different pictures. He also explains why that should be so and, more trenchantly, that because many of the components of both reports are averages of indices of yet more averages of global trade numbers, they really don’t carry much value for the vast majority of people who grow and eat food. As for speculators, while I still don’t believe they cause price spikes, I’m fascinated by this:

Why the international trade and export quotations numbers dominate is revealed, in a roundabout way, by a regular paragraph in the AMIS Market Monitor. The monthly pronouncement has this to say about investment flows (that is, money chasing foodgrain), for 2013 February: “Managed money was a significant seller of wheat, maize and soybeans as futures prices attained early January lows prior to USDA stocks report”. Pay attention to that term, ‘managed money’, which means funds run by banks and big investment agencies. “Managed money reversed its position in wheat from long (bullish) to short (bearish) but maintains long positions in maize and soybeans.” Now the confusion should clear somewhat. The index helps traders and exchanges deal better with volumes of grain (and dairy and meat and edible oil). AMIS helps them with a great deal more sophistication.

Got that? Investors think the price of wheat is coming down, while that of maize and soybeans is going up. No word on horsemeat.

One Reply to “What’s that got to do with the price of food?”

  1. Thanks for this. The development of ICTs in the agricultural sector was driven in part by the need for market information services. Now several ‘apps’ exist that provide just this type of service to (local) farmers and (regional) resellers in developing countries.

    Your post leaves me wondering: what are the sources of the price data that is actually sent to farmers through these apps?

    While clearly showing that FAO’s FPI and AMIS services do not cater to most farmers’ needs, ‘Resources Research’ should have gone the extra mile and examined what actual information (and its source) is shared via SMS, radio programmes, cooperatives the “ICT4Ag” crowd is regurlarly talking about… Maybe the AMIS and FPI are serving their purpose (inform commodity traders), and are not really meant to inform (small) farmers and (regional) resellers on the price of other crops.

    I suspect many of these apps don’t use AMIS or FPI to inform farmers on crop market prices, but I will have to look into this. Will post on RR when I find the time to search ICTupdate’s archive.

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