Financial Derivatives And Food Insecurity

Financial derivatives especially commodities futures have been largely blamed for the recent increase in food prices and hence increase in food insecurity around the world,especially in less developed countries.This brought serious disagreements between most economists and policy makers as to whether financial derivatives were the main cause of the price hikes in 2007 to mid-2008 and in 2010/2011.I collect data on commodities futures for corn,wheat,soya beans and rice from 1986 to 2015 and OTC(over the counter)data on commodities linked derivatives and then use Principal Component Analysis(PCA)approach to extract the proxy of commodities futures trading.Following literature,I use the ratio of Consumer price indexes(CPI)and GDP per capita as a proxy for food insecurity.I run time series regressions for all samples and subsamples for lower-income,middle-income and high-income countries respectively.The overall empirical results show that financial derivatives have a higher impact on food insecurity in lower-income countries than in middle-income countries.The results also show that financial derivatives have no significant impact on food insecurity in high-income countries.Oil prices,on the other hand,had a significant impact on food insecurity in high-income countries.Analysis using world data also showed that financial derivatives has a significant impact on food insecurity.This paper,therefore,shows that financial derivatives are increasing food insecurity in the world and this is having a devastating effect on people in low-income countries.Policy makers including Commodities Futures Trading Commission(CFTC)and Financial Services Authority(FAS)should do more in controlling food speculation on the various futures markets.