Can financial speculation on commodities, widely seen as a key driver behind rocketing food prices, be curbed?
This story is part of AlertNet’s special report “Solutions For A Hungry World”
By Astrid Zweynert
LONDON (AlertNet) - In a Chicago skyscraper topped by Ceres, the Roman goddess of grains, traders are betting on the future price of wheat, maize and corn in deals that have come under increasing scrutiny since food prices hit record highs in 2008.
Since the crisis - which sparked riots from Kenya to Argentina and pushed millions of people into poverty - food prices have remained high and volatile.
Speculation on food prices played out on the trading floors of the Chicago Board of Trade and other commodity futures exchanges are to blame, critics say.
“People are starving because the markets are out of equilibrium,” said Yaneer Bar-Yam, director of the New England Complex Systems Institute (NECSI), a research institute, which has analysed the impact of speculation on food prices.
“Food prices have nothing to do any more with the real price of food, or the availability of food,” Bar-Yam told AlertNet.
Traders say food prices are determined by supply and demand, and that the prospect of food becoming scarcer as the global population is projected to hit 9 billion by 2050, is pushing prices higher.
Some experts say speculation does nothing more than aggravate other factors blamed for price rises, such as climate change, rising demand for food, export bans and soaring oil prices.
However, critics accuse banks, hedge funds and traders of exploiting the deregulation of the global commodity markets, initiated by the United States in 2000, to make a financial killing at the expense of the world's poor.
“Deregulation of commodity markets has led to increased volatility and contributed to food price spikes that have caused massive harm to millions across the world facing hunger and poverty, said Christine Haigh, campaigns officer at the World Development Movement (WDM), an advocacy group.
Before deregulation, agricultural futures markets were mainly used by farmers and food buyers to protect themselves from risks such as bad harvests. A futures contract provides protection by locking in a price for a promise to deliver a crop at a future date.
But in recent years, investors have poured unprecedented amounts of money into agricultural commodities - spurred to hunt elsewhere for profits after the dotcom crash of 2000, the U.S. property market meltdown in 2006 and the 2008 financial crisis.
They have become major players - in the past five years investment in food commodities by banks and hedge funds has risen to $126 billion from $65 billion five years ago, according to a report by WDM.
SPECULATION TO BLAME?
Other factors blamed for the high food prices include: changing eating habits, in particular in emerging economies such as India and China where more people have been able to afford meat than ever before, and the cultivation of biofuels, which takes valuable farmland out of food production.
“One problem in this debate is that it is very hard to quantify exactly how big the impact of speculators is," said Joerg Mayer, senior economic affairs officer at the United Nations Conference on Trade and Development (UNCTAD).
“It is most likely a combination of factors. But I believe the impact of active investors, who move in and out of the markets quickly to benefit from short-term price changes, has increased," he told AlertNet.
A 2011 study by UNCTAD concluded that the commodities market had stopped to function “properly” in a way where prices are shaped by supply and demand.
“The activities of financial participants drive commodity prices away from levels justified by market fundamentals,” the study said.
Many banks and fund managers are quick to dismiss the impact of speculation, saying there is no credible evidence to prove that it leads to more volatility.
"Short-term speculation creates a lot of noise," said Ashok Shah, chief investment officer at London & Capital.
"It makes headlines. But there are much larger drivers behind food price spikes, most of all changes in energy prices, which have been the biggest driver."
Olivier De Schutter, the U.N. Special Rapporteur on the right to food, says prices for a number of commodities fluctuated too wildly within a short period of time to have been the result of supply and demand.
Wheat prices, for example, rose 46 percent between January and February 2008, fell back almost completely by May and increased again by 21 percent in July before falling again in August 2008.
ANOTHER LOOK AT REGULATION
Curbing speculation by introducing more regulation is an answer being touted by a range of people - from anti-poverty campaigners to French President Nicolas Sarkozy and the Pope.
The United States led the way last year, by introducing limits that cap how much of the commodity market can be controlled by any type of market player. The rules are subject to a legal challenge by Wall Street’s top financial trading associations, which last December filed a lawsuit against the U.S. Commodity Futures Trading Commission’s new rules on commodity speculation.
Campaigners also want the European Union to take tough action.
In a letter last month they called on the EU to follow the US in introducing strict position limits, improve transparency, bolster supervisory powers and ban high-frequency trading, a technique that enables speculators to move in and out of positions fast.
UNCTAD’s Mayer said giving market authorities more control to intervene if prices swing out of control could work to smooth volatility.
“One solution would be to give market authorities the possibility to intervene directly into the market when prices fluctuate a lot, just like central banks do in the foreign exchange market,” he said.
The G20 group of industralised nations has also been considering steps to manage food price volatility.
It has introduced an Agricultural Markets Information System, which pools data about crop levels and harvests to improve information and prevent rumours sparking panic buying or selling in the markets.
But officials have said it will be hard to agree tough measures like position limits without consensus on the role of speculation in pushing up prices.
Leading U.S. economist Jeffrey Sachs says regulation is nothing more than a band aid to fix a much wider malaise in world agriculture, which has suffered from decades of under-investment.
“I remain to be convinced that it is a financial crisis ...,” he told a debate on food price volatility at the United Nations General Assembly in April.
”I worry a little bit that the focus on financial markets is going to distract us from more fundamental issues in fact, which I believe are basic supply and demand issues in the world agricultural markets,” Sachs said.
"LIFE IS VERY HARD"
There are signs some banks are listening to arguments that food price speculation harms millions of people.
Germany’s DekaBank, last month said it was pulling out of investing in basic food stuffs, such as wheat, soya, maize and meat.
DekaBank, which is owned by the German savings banks, said it would revamp its commodity fund after pressure group Foodwatch asked banks last October to withdraw from speculation in agricultural commodities after a review by experts.
“The academic discussion about this is not finished yet,” a Deka spokesman told AlertNet. “But we can’t exclude the possibility that such investments in commodity markets have had an impact on rising food prices.”
Deutsche Bank said in its annual corporate social responsibility report in March it would not launch any new investment products in staple agricultural products this year, as it continues to examine whether they have a negative impact on food price stability.
But for the world's poorest who typically spend between 60 and 80 percent of their income on food, even small increases in prices have big repercussions.
In Kenya, in just three months at the end of 2010 and early 2011 the prize of maize, a key staple food, rose by 27 percent.
“Life has become very hard because even if someone helps you with 200 shillings ($2.40)," said Lilian Kayes, who lives in the Kibera slum in Kenya’s capital Nairobi.
"There was a time 200 shillings would be enough to budget for a whole day, for breakfast, lunch and supper. But these days, 100 shillings buys breakfast and not even a good breakfast. And then lunch, it’s just mediocre lunch.”
((Additional reporting by Katy Migiro in Nairobi))
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