Effects of Quantitative Easing on Food Prices - Research Paper Example

Effects of quantitative easing on food prices Food prices are going upward again consecutively the third time in five years, creating a crisis-like situation on the global level. Price rise in corn, soybeans, and wheat has affected the global market, taking a jump 21 percent, 41 percent, and 31 per cent respectively since the start of the year 2012 (Hepburn par. 1). There could be various reasons of rise in food prices but it needs to be ascertained what role does quantitative easing plays in the rise of food costs. Stock market of commodities is deeply linked to quantitative Easing (QE), as there have been riots in the stock market for food items like wheat, soybeans, and corn. The impact of QE2 was so huge on the commodity market, which was due to global weather conditions. It left no possibility of predicting the production of food crops. Worldwide, the stock market for food grains became very compressive. The effect could be seen in the steady rise in the food prices even before the QE2 began (Anderson par. 1). Measuring the effect of QE in particular is not a routine and easy task, and generally in macro economics, an analysis cannot be made taking the whole economy for conducting an experiment. The size of the experimented market needs to be sufficiently huge, which is possible only when it is actually happening. It was expected that QE2 would bring down the mortgage rates, compelling the channeling of money in the stock market, build the wealth effect, and provide leverage to the small businesses, but it did not happen as expected (Anderson par. 7). The outcome of QE2 was “bad inflation,” which can be easily defined not only through increased food costs but increased mortgage rates, increased gasoline and heating oil costs as well. QE2 has been a totally ineffective tool in the hands of governments so far as its original purpose is concerned. The position of the Fed is just like the bus driver in the movie Speed. If it takes the bus safely and comes out clean and says that QE2 will be dropped out sooner for not being effective in controlling food prices, and for not performing as designed, it will be a jolt to the stock market and commodities prices. Responsibility can not be fixed until the Congress takes the class on why the Fed should be permitted to organize such experiments to deteriorate the health of the American economy. The outcome is clearly indicating at the failure of QE2 but the government is still continuing with the experiment, which seems to be a face-saving function of the government (Anderson par. 8). Further analysis over the effect of QE2 requires understanding the behavior of commodity market; why the commodity market reacts so sharply to QE2? At the easiest level there are two kinds of commodities: those for which people will go mad and others for which they won’t. Relatively, people are least impressed at the grass root level if there is an abnormal increase in the prices of gold and silver but an abnormal hike in the prices of wheat, soybeans, rice, and corn will affect the masses adversely. It is a matter of serious concern. It was expected that QE2 would halt the risky process of deflation, but there is no such deflation risk in the food commodities (Anderson par. 9). Investors are least interested to put their risks in commodities, as implications could be serious. The purpose behind creating futures markets for agricultural food items was to permit farmers to secure a selling price for their crops, food processors to ensure getting a buying price, and floor traders to get small retail bidders, which was equally beneficial for all chain partners in the past (Anderson par. 12). In the past, level of speculation in the food items was never that high, which is right now. Earlier ETFs were framed to hold long positions irrespective of price without any interruption. The futures regulators have taken note of it, and last week the Commodity Futures Trading Commission (CFTC) offered to regulate the number of commodity futures and option contracts that any investor can keep to stop speculation and possible tinkering (Anderson par. 13). QE2 has created foot riots in several countries, such as Algeria, Morocco, Yemen, and Jordan, and brought down the possible rise to power of one government in Tunisia. Agricultural products commodities business will be attracting world attention in the approaching time. Government would be under pressure to make a cut on QE2. Therefore, investing in commodities can prove to be a risky business, as the government might declare an “Emily Litella -- Never Mind Moment” and initiates the downfall of QE2, thus, creating the first “Black Swan” moment of 2011 (Anderson par. 19-20). The QE3 declared by the government needs to b brought to the halt by learning the lessons of the past history. According to the International Monetary Fund, product typically reduces 10 percent in comparison to the trend in the seven years after surviving a leading financial crisis. Incidentally, the US economy is just treading that road. The government may expect a sooner survival but has not succeeded other than creating an increase in commodity prices that harms the US and leading emerging markets, where food forms a bigger part of buyer spending (Sharma par. 7). It is quite surprising that the government is bent on taking the third step of quantitative easing, which could be relatively more harmful than the first two. It is because the food prices are crossing the danger mark to the degree that has worked as a tipping point for the economy worldwide in the past. Some economists’ link food prices to non-monetary reasons, such as geopolitical disturbances in the Middle East and drought conditions, but at this time, canceling QE3 is highly advised to going for it, as cancellation of QE3 would bring a fall in food prices. Abandoning QE3 would be like a critical tax cut for the middle class, working as a genuine boost for the global economy. Works Cited Hepburn, Andrew. “Food Price Hikes: Why I Blame Investors.” 24 September, 2012. 30 October 2012. . Anderson, James. “QE2 and the Commodities That Cause Riots.” 18 January 2011. Minyaville.com 29 October 2012 . Sharma, Ruchir. “For True Stimulus, Fed Should Drop QE3.” The Financial Times. 10 September 2012. 30 October 2012 . Read More