J.P. Morgan Global Commodity Research issues report on balancing global food shortages

Mar 27, 2013

With 868 million undernourished people in the world, despite a global food supply that exceeds minimum dietary energy requirements (MDER) by 50%, a recent Global Commodities Research analysis finds that futures markets can remedy crop supply/demand imbalances and promote food security by providing reliable and fair price benchmarks and by reducing price volatility in a resource-constrained world.

Written by Colin Fenton, Megan Hansen and Elizabeth Volynsky, the report, titled Commodity Markets Outlook and Strategy—Nine billion bellies: Managing food, water, land and air to 2050, cites a United Nations Food and Agriculture Organization (FAO) study that finds that 98% of the world’s undernourished population is located in developing regions of Africa, Asia, Latin America, the Caribbean and Oceania.

With the global population expected to gain two billion people within the next 30 years, the World Bank notes: “For the 70% of the world’s poor who live in rural areas, agriculture is the main source of income and employment,” but they represent the same population that remains the most hungry.

A major contributor to food shortages, according to the World Food Program, is drought; about 70% of the “food emergencies” in the developing countries were partially attributable to drought. “Similarly to food, improving yields, and thus the water required, will be most effective at boosting food supply for the growing population within the resource constraints,” the J.P. Morgan analysts say.

With the supply of minimum dietary energy requirements at 50% above what is required, there should be enough food to go around, the J.P. Morgan Commodity Research team says. “Yet, almost one billion people are still hungry, while obesity is a booming trend in many parts of the developed world,” their report says. “These troubling facts suggest inefficient distribution networks as well as unhealthy dietary habits among some consumers who are lucky enough to have regular and ample access to food.”

Fenton and his team suggest that the futures markets have two important roles to play in balancing out supply and reducing price volatility.

“First, futures markets provide reliable and fair benchmarks for price, whereby various physical basis markets can equilibrate to move supplies to where they are most needed and to discourage thoughtless waste,” they write, adding that the markets resolve imbalances dispassionately and efficiently.

The second way, they say, is by reducing price volatility in a resource-constrained world. “This is a counterintuitive fact for some observers, but it is why futures markets will become an increasingly important risk management tool in food markets as the demand of the growing population strains limited supplies,” the analysis says. One way futures markers diminish price volatility is by removing the economic incentive to hoard physical supplies or to limit their transit across national borders through export controls.

It goes on to say that food prices have actually been very low when measured against the disposable incomes in the U.S., Europe and other developed nations. In fact, prices have been too low to curb gross waste of food at the consumer level in the rich countries.

Prices should be allowed to move freely to encourage investment in the food system infrastructure and constrain demand for food that will not be actually used, they say, even if particular prices are painful for some consumers and producers in the short run.

“If farmers’ margins are too small to allow for needed investment in new production, storage and distribution facilities, necessary investment will not get made and consumers will ultimately have to bear the consequences,” the report concludes. “Producers, especially small ones in rural areas in developing markets, would benefit from cheap (if not free) electronic access to accurate information on market fundamentals and prices, so that they can make informed decisions that benefit their local communities and the broader world.”

For access to the complete report, log on to J.P.  Morgan Markets


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