Accurate market price formation model with both supply-demand and trend-following for global food prices providing policy recommendations
2015
Lagi, Marco | Bar-Yam, Yavni | Bertrand, Karla Z. | Bar-Yam, Yaneer
Significance Recent increases in food prices are linked to widespread hunger and social unrest. The causes of high food prices have been debated. Here we rule out explanations that are not consistent with the data and construct a dynamic model of food prices using two factors determined to have the largest impact: corn-to-ethanol conversion and investor speculation. We overcome limitations of equilibrium theories that are unable to quantify the impact of speculation by using a dynamic model of trend following. The model accurately fits the data. Ethanol conversion results in a smooth price increase, whereas speculation results in bubbles and crashes. These findings significantly inform the discussion about food prices and market equilibrium and have immediate policy implications.
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