CAUSES OF THE CRISIS 43


such as Chinese growth rates and exchange rates (because investors could use commodity prices to expose themselves to Chinese growth and to hedge against exchange rate movements). He finds that futures positions have a large effect on food prices.


Although this descriptive and econometric evidence seems superficially compelling, it is quite difficult to construe causality from it. Part of the recent comovement between rising spot prices and rising futures prices comes about because financial speculation through securitization is most profitable when there is substantial volatility in the underlying markets. When markets are flat, futures contracts tend merely to reflect the discounted future value at today’s prices. But when markets are in turmoil, expectations of future prices may vary considerably (CBC 2008). Thus speculation may be more a symptom than a cause of underlying volatility. And because expectations play a role in futures markets (by definition), Granger-causality tests based on time lags (as in Robles and Cooke 2009) may not be indicative of causation, especially in the absence of a full set of other control variables. Indeed, this “Christmas cards Granger-cause Christmas” problem is a well-known fallacy in time series econometric work (Atukeren 2008). Gilbert’s (2010) results, however, are only as good as his instruments. Of particular concern is that such instruments as Chinese economic growth and stock market performance may not be validly excluded from the equation explaining agricultural prices. Of course, by the same token these caveats on the evidence do not mean that the evidence is wrong, only that the jury is still out.


Trade Shocks: Export Restrictions, Import Surges, and Droughts Export restrictions and import surges are widely regarded as an especially potent explanation for the sharp increase in rice prices, although Headey (2010) finds evidence of important trade shocks in wheat and maize markets as well. Even so, there are several reasons why rice markets are vulnerable to shocks. Rice itself is unusual in having relatively weak substitution effects with other cereals, being mostly produced by smallholders, constituting a large proportion of the diets of millions of people, and being very thinly traded (IRRI 2008; Timmer 2009). Hence, for political reasons, very few Asian governments are willing to tolerate significant increases in rice prices, and many countries have permanent trade distortions applying to rice. Indeed, the notoriously thin trade in rice, with global imports constituting less than 10 percent of all rice consumption, partly explains why international rice prices have always been more volatile than other prices and much more vola- tile than domestic rice prices.


Rice is therefore quite clearly a special case relative to other grains. Indeed, from August 2005 until November 2007 rice prices increased steadily


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