Letting them eat cake has always been a surefire way to spark a revolution, but did a spike in food prices, as opposed to a thirst for liberty, ignite the Arab Spring? And is that just the first of a series of much worse conflagrations? That’s the conclusion of a scientific paper submitted for publication earlier this month by researchers at the New England Complex Systems Institute, which found a causal relationship between critically high food prices and social unrest.
Using the United Nations Food and Agriculture Organization’s Food Price Index as a benchmark, the paper’s authors argued that past a certain price point for food--which was crossed shortly before the global food riots in 2008 and again in late 2010 on the cusp of the Arab Spring--citizens begin to look at their rulers differently. To borrow the lingo of complexity science, the relationship between food prices and the consent of the governed is “non-linear,” i.e. “widespread unrest does not arise from long-standing political failings of the system,” the authors wrote, “but rather from its sudden perceived failure to provide essential security to the population.” All’s quiet, in other words, until a certain threshold is crossed, when all hell breaks loose. And now the bad news: If current trends continue, the authors note, prices will permanently cross that barrier as early as next July. Prepare for a lot of angry people.
What’s causing this run-up in prices, even as global cereals production is at an all-time high? The stock answer is increasing prosperity; an emerging middle class wants an American middle class diet. This dietary shift is non-linear, too--people don’t simply eat more grain, but switch to eating pork, which requires six times as much grain to raise it. (That’s why China has a strategic pork reserve and why Brazil has plowed under the Cerrado to feed it.) As Oxford economist Paul Collier notes in his book The Plundered Planet, the relationship between income elasticity and the price (in-)elasticity of food means that “quite modest increases in global income will drive food prices up alarmingly unless matched by increases in supply.”
But that’s not what the paper’s authors found. In a separate, as-yet-unpublished paper, they attribute the price rise to two distinct causes: “the price peaks are due to speculators causing price bubbles, and the background increase… is due to corn to ethanol conversion.” The latter makes perfect sense: Instead of increasing production to feed a growing population, ethanol subsidies have the perverse effect of feeding fewer people despite more food. But if speculators were responsible for the price spikes, and the spikes were responsible for the Arab Spring, then who ultimately deserves the credit for deposing Mubarak and Gaddafi, and the blame for bringing millions to the brink of starvation?
A year ago, in an article for Harpers, the journalist Frederick Kaufman laid the blame at the feet of Goldman Sachs. The bank had been the first to create an index fund pegged to commodity futures, including corn and several varieties of wheat. A hallmark of these funds is that they continually roll their positions over--and over, and over--to keep investors’ money busy elsewhere.
The model proved so appealing, Kaufman reported, that commodity index holdings soared from $13 billion in 2003 to $317 billion in 2008. By 2008, an anonymous trader told Kaufman, the mounting pressure of all that money pouring into futures had caused contango in the wheat markets. Contango is the market phenomenon in which futures prices jump ahead of the current price, causing trading algorithms to drive up the spot prices to chase the futures prices. “At which point the markets veered into insanity,” Kaufman wrote.
In this version of events correct? The OECD Trade and Agriculture Directorate cleared speculators of any blame in its own investigation into the 2008 commodities bubbles, without fingering a culprit of its own. With food prices once again hovering on the brink, it's incumbent to find one or the Arab Spring may transition to the Global Spring.
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[Image: Flickr user Magharebia]