Economy: here's why food is action

Economy: here's why food is action

June 03, 2016

Economy: here's why food is action

Price fluctuations in food commodities have a significant impact on food sustainability for families. BCFN has developed a model which takes into account determining factors for variations in the price of raw materials.

Food prices are subject to wide variation in the marketplace. In the period between July 2010 and February 2011, in fact, the FAO Food Price Index increased by 38%, but in recent years the value of this index, which includes various food commodities (in other words, raw materials), has been gradually decreasing, thanks to a series of excellent harvests on a global level. The lesson to be learned from the past few years, however, is that we should continue to pay close attention to the question of food prices and the sudden changes that may affect them.

The BCFN model
The Barilla Center for Food & Nutrition has designed a study which aims to identify the variables that influence the prices of food commodities, and which will help to evaluate the effects of price increases on family food security (especially in low-income families) and on the economic and political stability of countries (particularly developing countries).
First and foremost, this model pinpoints factors that can be attributed to demand (levels of food reserves, demographic factors, economic growth in developing countries, food choices) and those which depend on supply (agricultural production, scarcity of natural resources, the production of biofuels, the effects of climate change). These are known as endogenous factors.
To these we can add certain common factors which are exogenous, or external to the determination of prices, but which have a direct or indirect influence on price levels. Among these, the proposed model takes financial markets and money markets into account, also the prices of oil and energy, international trade policies and geopolitical dynamics. Many of these factors have complex interactions in the balance of supply and demand, and are linked to each other in a number of ways.

Long-term interventions
All the elements identified in the model can also be divided according to the type of effect they have on prices and the relevant timescale involved: an increase in price volatility in the short term, or increased prices in the medium to long term. This evaluation also indicates that the effects of certain factors can only be modified in the medium to long term, and that changes in the structural conditions of demand and supply may result in a process of modification. This is the case, for instance, with economic and population growth in emerging countries, which leads to a considerable increase in demand for foodstuffs; also urbanisation, rising temperatures due to climate change, and the gradually worsening scarcity in natural resources.
Imbalances between demand and supply lie at the root of variations in prices. For example, in a situation where factors such as global population growth are combined with climatic events (drought, wildfires and flooding in key areas for the world’s agriculture) - all against a background of low food reserves - the outcome can only be massive disturbance on world markets. And if the political response is geared towards protectionism, the result - as observed globally - will be sudden price rises and growing uncertainty.

Seven areas for intervention
How can such a complex system be acted upon in order to guide development towards sustainability? For any intervention it is essential to divide the factors examined according to the concrete possibility of influencing them, whether it is to reduce volatility or to prevent excessive price rises which are incompatible with global objectives for food security and the development of the agricultural sector.
BCFM has identified seven areas for intervention.
  • Define optimal patterns of growth and productivity in various geographical contexts. The challenge is to encourage further innovation processes, guiding the sector towards a fine-tuning of sustainable models of agriculture and food production: better quality products and less environmental impact, avoiding the intensive use of resources.
  • Face up to the scarcity of natural resources for farming. The limited availability of natural resources, especially water and agricultural land, presents a substantial constraint on the production capacity of world farming.
  • Resolutely combat the effects of climate change. The most authoritative studies on climate change show that the scenario considered most likely is that in the absence of radical intervention, global agriculture production will decrease at the same rate as the fall in cultivated land area. Furthermore, the effects of climate change could have a negative impact on certain geographical areas and on their ability to ensure adequate levels of production compared to current levels.
  • Reduce barriers to imports, subsidies for exports and the various forms of trade restriction. The imposition of trade barriers and subsidies is a distorting factor in the dynamics between demand and supply on the international food market.
  • Create a multilateral system for food reserves and improve transparency on flows and stocks. In recent years, various factors have made it necessary to draw on reserves accumulated over time in order to meet the growing demand for foodstuffs (which has increased faster than supply) and stabilise domestic prices. Analysis has indicated a strong link between fluctuations in reserves and trends in food prices.
  • Prevent cultivation for biofuels from competing with the cultivation of food crops. On the international level, the price of food is strongly associated with the price of oil. Increases in oil prices mean that biofuels become more attractive and strengthen global demand for them. Since the majority of (first generation) biofuels are produced using the same crops also used for food or livestock rearing (cereals, sugar cane, vegetable oils etc), competition occurs between the energy sector and the food sector for the use of prime agricultural resources.
  • Regulate financial speculation on food commodities. Futures markets are an integral part of the world food market and they fulfil two important functions: they facilitate the transfer of risk to prices and contribute to the formation of the price itself. Nevertheless, in recent years the global financial crisis has led non-commercial investors - in other words, those not linked to the actual use of foodstuffs - such as investment funds or hedge funds, to increase investment in the derivatives of agricultural commodities, in order to diversify their portfolio. A rise in the number of contracts in the hands of non-commercial investors can result in speculation, a typical phenomenon in stock markets.

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