Finally, a physical reserve, whether regional or
global, will not resolve the problem of links among the financial, energy, and food commodity mar- kets. Tis is a key problem that could be extremely relevant if excessive speculation is indeed a cause of extreme price spikes. More active use of financial instruments. Two
major proposals are linked to the use of financial instruments: (1) virtual reserves17 and (2) a tool- box of market-based risk management tools. A virtual reserve would involve intervening in
futures markets based on price volatility data from the early warning mechanism already described or, in extreme cases, a decision by a technical commit- tee. Tis intervention would consist of executing a number of progressive short sales (that is, sell- ing a firm promise to deliver the commodity at a later date at a specified price) until futures prices and spot prices decline to specified acceptable lev- els. Tis increase in short sales would reduce spot prices and should lower extreme price volatility by cuting the probability of abnormal returns. Most of the time, futures contracts would be setled through offseting purchases or sales—in other words, the whole operation would be virtual. Only rarely would it be necessary to obtain the neces- sary grain supply to comply with futures contract delivery requirements. A virtual reserve has several advantages compared with a physical reserve: it is just a signaling mechanism; it does not put more stress on commodity markets; it does not incur the significant storage and opportunity costs of a phys- ical reserve; it resolves the problem of the inter- linkages between the financial and the commodity markets; and given that it is only a signal, it should have only a minimal effect on markets. Te toolbox, proposed in the 2011 meeting of
the G20 ministers of agriculture, would include mechanisms such as physical or financial commod- ity price hedges, insurance, and guarantee instru- ments, as well as countercyclical lending, which could help vulnerable countries mitigate the risks associated with excessive food price volatility. Two initiatives are being implemented. Te first, under the management of the International Finance Cor- poration, involves a new Agriculture Price Risk Management tool that will allow producers and
22 RIDING THE ROLLERCOASTER
consumers to hedge against downside or upside price risks on a pilot basis. Te second is a World Bank proposal to facilitate governments’ access to risk management markets. It entails helping to structure and execute financial and physical com- modity risk hedging and to build capacity related to the legal, regulatory, and technical requirements associated with using these tools. Both of these initiatives will need to be evaluated to ensure their
effectiveness, viability, and sustainability. Stricter regulation. Since late 2005 problems
have plagued the futures and cash markets for maize, soybeans, and wheat. Te main problem is lack of convergence between cash and futures prices. To address this issue, the US Commodity Futures Trading Commission, other agencies in the US government, and the European Commis- sion, along with the futures industry, have moved forward with seting seasonal storage rates, impos- ing limits on the number of delivery certificates an entity can hold for noncommercial purposes, and puting out an additional issue of the Commit- ments of Traders report to increase transparency. For example, in October 2011 the US Commod- ity Futures Trading Commission approved caps on speculation in food, energy, and metals, restrict- ing the size of positions to 25 percent of deliver- able supply. If the structural changes put in place do not significantly improve the price convergence between futures and cash prices, then a cash-set- tled contract must be seriously considered.
CONCLUSIONS
Te global food price crises of 2007–08 and 2010– 11 led to economic difficulties for the poor, con- tributed to political turmoil in many countries, and in the long run could undermine confidence in global food markets, thereby hampering these markets’ performance in balancing fundamen- tal changes in supply, demand, and production costs. More important, food price crises can result in unreasonable or unwanted price fluctuations that can harm the poor, especially by compromis- ing their nutrition security. One consequence is long-term, irreversible nutritional damage, espe- cially among children. Terefore these recent food
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