While regulating financial activity in global commodity markets is important, it is not enough to avert increasing food insecurity. Policymakers must also take measures to help developing countries build reserves of essential goods and manage price fluctuations, perhaps through a publicly managed virtual reserve mechanism.
NEW DELHI – Among the numerous crises that have erupted around the world, the avoidable tragedy of growing hunger receives only fleeting mention. And the attention it actually attracts is apparently not enough to prompt global policymakers to act.
But a new report from the United Nations Food and Agriculture Organization (FAO) makes for bleak reading. According to the State of Food Security and Nutrition in the World 2023 report, an estimated 42% of the world’s population – more than 3.1 billion people – could not afford a healthy diet in 2021. In addition, global hunger remains well above pre-pandemic levels. In 2022, around 122 million more people are food insecure than in 2019, and the number is increasing across Africa, West Asia and the Caribbean, partly due to higher levels of food insecurity prices can be attributed.
At the national level, a worrying pattern emerges: the countries experiencing the greatest increases in food insecurity are also those experiencing debt crises and feeling the most severe impacts of climate change.
Hunger reflects the interaction between food supply, purchasing power and prices. Supplies depend on domestic production, which can be affected by extreme weather and conflict, and on a country’s ability to import food, which can be affected by high transportation costs and foreign exchange restrictions. The purchasing power of households and individuals is determined by the availability of income opportunities; Cash wages and income from self-employment in relation to food prices; and the level of social protection, for example through the public provision of essential goods. Food prices are now largely determined by national and international trade patterns.
But as I outlined earlier this year, there is growing awareness of the concentration of power in the agricultural industry and the ability of the sector’s giants to influence global food prices. In addition, speculative activity in commodity futures markets can affect food prices in spot markets.
Both factors were discussed in detail in the 2023 Trade and Development Report published by the United Nations Conference on Trade and Development. It confirms that “corporate profits from financial transactions appear to be strongly associated with periods of excessive speculation in commodity markets and with the growth of shadow banking.” The report further states that “certain large food trading companies appear to be strongly associated with periods of increased price volatility in financial markets achieve higher profits”.
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Speculative activity is, by nature, short-lived. For example, the sharp rise in global food prices (particularly wheat), which began at the end of 2021 in the run-up to the Ukraine war, peaked in May 2022 and then fell just as quickly. For example, wheat prices in August 2023 were well below their August 2021 level.
This should have made life easier for food importing countries. And one could argue that short-term increases in food prices can be ignored because they are short-term fluctuations. But in many countries, domestic food prices remained high or continued to rise even as world prices fell. That’s not new. Something similar happened during the 2007-2008 global food crisis, when prices rose in many low- and middle-income countries even though global food prices had already fallen significantly.
Much of the problem stems from the ability to import food. The period from the beginning of 2022 was marked by several cascading shocks that hit several food-importing countries particularly hard: the end of the moratorium on sovereign debt repayments; the transition to tighter monetary policies and higher interest rates in advanced economies, which led to capital flight from developing countries; and upward pressure on import bills due to higher energy prices. In particular, unsustainable foreign debt and the insistence on repayments have made it difficult to maintain vital imports. Together, these factors have led to sharp currency devaluations, causing local prices for imported food to become significantly higher.
The FAO has identified ten countries where food prices rose well above global trends in the period ending mid-September 2023: Argentina, Ecuador, Ghana, Malawi, Myanmar, Pakistan, South Sudan, Sudan, Zambia and Zimbabwe. All of them have serious national debt problems and an acute shortage of foreign currency.
Aside from Ecuador (due to its dollar economy), these countries have also experienced sharp currency devaluations since the start of 2022, ranging from 24% for Zambia to a whopping 344% for Argentina, according to my calculations using the CEIC database. Economic mismanagement is only partly to blame. Instead, large fluctuations in cross-border capital flows as a result of macroeconomic policies in the world’s major economies are likely to have a larger impact.
This means that attempting to control financial activity in global commodity markets, while necessary, is not sufficient to combat hunger. Policymakers need to reconsider other means of stabilizing food prices, such as national agricultural policies and international trading systems that, soil and climate permitting, ensure self-sufficiency in domestic or regional staple foods.
Building grain reserves to maintain domestic and regional supplies is again an important issue and should be given serious consideration. (The United States uses strategic oil reserves to control fuel prices, but food is no less important for most countries.) In addition to emergency reserves, social protection will also be crucial to preventing food insecurity. This means that policy must focus more on public investment while at the same time creating incentives for the private sector to invest in sustainable small-scale agriculture.
Establishing a publicly managed virtual reserve mechanism with the possibility of direct government intervention in physical and financial markets could also help countries deal with global price fluctuations. This would require small amounts of decentralized physical reserves, coupled with a financial fund to intervene against price spikes or declines in the futures markets. In financialized commodity markets as well as foreign exchange markets, government intervention could even help market participants identify true fundamentals. Low- and middle-income countries also need to think about how to manage short-term capital flows, particularly to prevent them from destabilizing domestic food prices.
The fight against global hunger requires policymakers to understand and address its root causes. Regulating financial activities in volatile commodity markets is just one of the necessary institutional changes. To withstand price fluctuations, countries and regions also need to be helped to build reserves of essential foodstuffs.
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