FAC Working Paper 47
Price volatility is exacerbated by the tendency of market actors to follow momentum strategies, where price rises encourage more buying, and falls encourage selling.
This paper focuses on the impacts of this activity with respect to global food prices, in order to understand the relationship between financial markets and food price volatility.
It examines how the relationship between financial actors and food commodity markets – particularly futures markets – changed in the last ten years. The paper also explores the benefits and costs of the increased role of financial sector actors in these markets, and how the balance between benefits and costs might change in the future. Further, it asks what reforms, if any, are needed to ensure that benefits exceed costs.
The paper establishes the context in terms of price movements and the evolution of food and financial markets over the past decade, and develops a typology of speculation as a framework for thinking about these issues. It goes on to apply this typology to global food markets, and reviews the differing explanations for food price movements. The author also considers the role of uncertainty and complexity, and the role of financial markets in this regard, and considers some policy options.