Export Cartels, Financial Speculation and Commodity Crises

• Applicant: Dr. Hinnerk Gnutzmann
• Subject Area: Economic Policy, Applied Economics
• Term: from 2015 to 2016
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 277312831

In 2007-2008, a food crisis erupted and raised the prices of vital commodities by 40% on average. While the severity of the crisis, especially on the developing world, is undoubted, so far little is known about the root causes of the crisis and how one may hope to mitigate future ones. Will shed light on this issue, by investigating the connection between financial speculation, the formation of export cartels, and the subsequent commodity crisis. Our preliminary work indicates that this hypothesis may provide a novel and compelling explanation of both the timing and severity of the crisis.The project consists of four work packages. First, we investigate theoretically the relationship between financial speculation and the sustainability of an export cartel. Second, we study trade policy and institutional responses to export cartels. Third, we explore empirically the role of financial speculation on the formation of the global fertilizer cartel from 2007 and the subsequent food crisis. Finally, a highly-integrated work package will develop a structural model of the commodity market with speculation and cartel formation, combining results from all previous work packages.Is food speculation a "scandal" (EU Commissioner Bernier)? Supposedly so, if it causes high food prices that starve the developing world. The current literature on the role of finance in the food crisis has generally asked whether speculation increases the co-movement of food prices with financial indices; results have been ambiguous. We believe they may have looked in the wrong place: speculation may have contributed to the formation of a global cartel for fertilizer, which happened exactly at the crisis time. And fertilizer is an essential input to industrial food production; in our preliminary work, we estimate that this cost shock may explain nearly two-thirds of the crisis time price increase.The Beethoven call offers a unique opportunity for research in this important area, facilitating tight integration of research experience in financial economics and econometrics (Poland) with international trade and industrial organization (Germany). Together with our international collaborators in competition law (Italy) and empirical finance (China), we look forward to a very fruitful project.

• DFG Programme: Research Grants
• International Connection: Poland
• Cooperation Partner: Professor Dr. Oskar Kowalewski