Roles of commodity futures derivatives and financial crises in global food security

Abstract

Commodity futures have been largely blamed for the price hikes in 2007/mid-2008 and 2010/2011 and the decreased food security around the world, especially in less developed countries. There still exist serious disagreements between most economists and policymakers as to whether this is the case. We run time-series regressions for all samples and subsamples for lower-income, middle-income, and high-income countries respectively. The empirical results show that commodity futures have a more significant negative impact on food security in low-income countries than in middle-income and high-income economies. Financial crises, however, have a significant impact on food security in all the regional divisions as a whole and are seen to exasperate the negative effect of some of the commodity futures on food security. We also find evidence that a certain degree of speculation in some commodities stabilises prices of those commodities as expected by theory. Our results have important policy implications as policymakers must control these speculations but should also be careful not to overregulate the market.

Keywords:

• Food security
• financial crises
• futures market
• speculation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The FAO allocates only bulk harvest within the calendar year as part of the production data. Crops harvested close to the end of a year are included in the next year’s production data.

2 According to the FAO, arable land includes land under temporary crops (double-cropped areas are counted once), temporary meadows for mowing or for pasture, land under market or kitchen gardens, and land temporarily fallow.

3 Coffee and tea are not included in the Food Production Index because they are considered as having no nutritive value.

4 Reportable firms, according to the US Commodity Futures Trading Commission (CFTC), include clearing members, futures commissions merchants, and foreign brokers. These firms are expected to file daily reports with the commission, showing the positions of traders in futures and options markets at or higher than the levels established by the CFTC regulations. Reportable traders therefore are traders holding positions in futures and options contracts higher than the reporting levels set by the CFTC. Total reportable positions reported with the commission are estimated to be about 70–90% of the total open interest in any specific market. The CFTC classifies all the reportable traders' futures positions as either ‘commercial’ or ‘noncommercial’. A trader’s position is classified as commercial when the trader mainly uses the futures contract for hedging (based on the CFTC’s definition of hedging); on the other hand, a noncommercial position is applied when the CFTC determines that the trader uses the futures contract mainly for speculative activities in order to gain financial benefits (Robels et al. 2009).

5 For univariate cases, $m_{it}=\raisebox{1ex}{$\left|a_{it}\right|$}\!\left/ \!\raisebox{-1ex}{$\sqrt{h_{it}}$}\right. \sim N(0,1).$

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [Grant No. 71850011] and the Fundamental Research Funds for the Central Universities [Grant No. 20720181004].