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Modeling Food Prices and Social Unrest

April 9, 2014

One of the driving questions in the early days of economics was the "guns or butter" dichotomy. When you have limited resources, does it make sense to spend too much of your wealth on armament when your population is starving?

Because of today's energy demands, the context has shifted to "corn or ethanol," with corn further divided into corn for human or animal consumption; that is, "corn flakes or beef." In the later case, you have either a lot of corn flakes or just a little beef. Furthermore, investor speculation in corn in the commodity markets seems to be a modern version of the Biblical Parable of the Rich Fool (Luke 12:16-21).

Corn with ethanol moleculeFood or fuel?

Food prices are rising, since some segments of the economy want lower fuel cost.

(Corn image by Ashlyak, and ethanol image via Wikimedia Commons.)

A hungry populace tends to be an unhappy populace, as Marie Antoinette discovered. Although the quotation, "Let them eat cake," has been attributed to her, she likely never said this. However, the principle remains. Recent climate affects have exacerbated the food supply problems for vulnerable populations throughout the world.

At least since 2011, the New England Complex Systems Institute[1] has been publishing studies on the causes of spikes in the price of food. A 2011 study, "The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion," was published on arXiv in 2011,[2-3] as was an update to the study at the end of 2012.[4] The deflated cost of food from 1960 to the present, from data available from the Food and Agriculture Organization of the United Nations (FAO), is shown in the graph.

Deflated food price index
The deflated cost of food from 1960 to the present, Graphed using LibreOffice from data of the Food and Agriculture Organization of the United Nations.

I mentioned the use of corn for ethanol production having an impact on food prices, and the following figure seems to prove the point. However, we're always cautioned that correlation does not imply causation.

Corn and ethanol prices, 1991-2010Corn used for ethanol and food prices, 1991-2010

The values are normalized from 0-1 for each, and the dotted lines are a second-order fit from 1999.

(New England Complex Systems Institute figure.)

Agriculture is somewhat energy-intensive, so we can always argue that high food prices are just a consequence of high energy cost. The following figure disproves this point by showing that the peak in oil prices follows the peak in wheat prices. If oil price were the cause of the wheat price peak, its price peak would precede that of wheat.

Oil and wheat prices, 2004-2011Oil and wheat prices, 2004-2011

The peak in oil price (black line) follows the peak in wheat price (blue line).

(New England Complex Systems Institute figure.)

In their modeling of food prices, first published in 2011,[2] and then extended by data through January, 2012,[4] Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand and Yaneer Bar-Yam from the New England Complex Systems Institute show that speculators playing in the commodity market, and food conversion into ethanol, were the dominant factors influencing food price. A comparison of the model and actual food prices is shown in the figure. The authors write that a significant decrease in the conversion of corn to ethanol is warranted.[3]

Food price fit with ethanol and speculatorsFood Price Model

The FAO Food Price Index is shown in blue, while the ethanol-speculator model is shown in red.

(New England Complex Systems Institute figure.)

Another arXiv paper[6] links huge peaks in food prices with the riots and revolutions in North Africa and the Middle East in the period 2009-2011. As the authors write in the paper's abstract,
"These observations suggest that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations."[6]

References:

  1. New England Complex Systems Institute Web Site.
  2. Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand and Yaneer Bar-Yam, "The Food Crises: A quantitative model of food prices including speculators and ethanol conversion," arXiv Preprint Server, September 21, 2011.
  3. New England Complex Systems Institute Press Release Associated with Ref. 2.
  4. Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand and Yaneer Bar-Yam, "UPDATE February 2012 - The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion" arXiv Preprint Server, March 30, 2012.
  5. Figures for The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion, New England Complex Systems Institute.
  6. Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam, "The Food Crises and Political Instability in North Africa and the Middle East" arXiv Preprint Server, August 11, 2011.

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Linked Keywords: Economics; guns versus butter model; guns or butter; dichotomy; scarcity; limited resources; wealth; weapon; armament; starvation; starving; world energy consumption; energy demand; maize; corn; ethanol; human; animal husbandry; corn flakes; beef; investor; speculation; commodity market; Biblical; Parable of the Rich Fool; Luke 12:16-21; Wikimedia Commons; Marie Antoinette; Let them eat cake; climate change; New England Complex Systems Institute; arXiv; inflation; deflated; Food and Agriculture Organization of the United Nations; LibreOffice Calc; correlation does not imply causation; agriculture; petroleum; oil; wheat; computer simulation; modeling; Marco Lagi; Yavni Bar-Yam; Karla Z. Bertrand; Yaneer Bar-Yam; speculator; commodity market; riot; revolution; North Africa; Middle East; abstract.

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