Global Policy Forum

Treating Food Like Stocks and Shares is a Recipe for Disaster


Financial speculation on food commodities brings uncertainty and volatility to the markets and is a major threat to the world’s poor. The Institute of International Finance has estimated that by the middle of last year, $450bn of financial assets was invested in commodities or derivatives betting on future price movements. UNCTAD is urging the world’s regulators to take a series of measures to control and limit speculation.  A financial transaction tax is the most likely measure to succeed, as at least 11 European countries are close to adopting such a levy in the near future. But lobbying by financial firms will likely prevent any serious regulation of futures and derivatives. 

By Heather Stewart

October 13, 2012

Droughts, storms, floods – after this year's washout of a summer, it is hardly a surprise that farmers are warning of rising food prices on supermarket shelves.

The price of wheat is 16% higher than this time last year; corn costs are up 7%; and there is an increasingly fierce battle about how to make the best use of agricultural land.

But don't be fooled into thinking this is a simple tale of supply and demand – crops keeling over in the baking midwest sunshine and hungry mouths to feed thousands of miles away. The world market for food includes not just farmers and shoppers, but hundreds of millions of dollars of complex financial bets.

Wall Street's geniuses are forever looking for new products to package and sell. Over the past decade, helped by a convincing pitch about hungry Chinese factory workers and harvests ravaged by climate change, they have persuaded investors, including ordinary pension funds, to plough billions of dollars into commodities, including food.

The Institute of International Finance has estimated that by the middle of last year, $450bn of financial assets was invested in commodities – or derivatives, betting on future price movements.

In principle, there would be nothing wrong with financiers moving into the food market if it directed billions of dollars of investment towards expanding production, bringing new land into cultivation and developing new technologies to boost yields.

But – as the thoroughly mad market for mortgage-backed securities in the run-up to the credit crisis, and the resulting building boom across the US, illustrated very clearly – the price signals emerging from the stampeding herds of Wall street can be deeply misleading.

In a recent paper, provocatively titled "Don't Blame the Physical Markets," the UN's trade and development arm, Unctad, argued that the wall of money flooding into commodities has badly distorted the price signals a well-functioning market should send to producers and consumers.

"It is not commonly recognised that demand from financial investors in the commodity markets has become overwhelming during the last decade," Unctad says.

It uses a striking pair of charts to show that over the past 10 years, the prices of food, and of commodities more generally, have moved closely into synch with other financial assets, such as stocks and shares.

In 2002, west Texas oil prices, and an index of other commodities, shifted up and down largely independently of European equities – due to fluctuating supply and demand in those markets. But by the early part of this year, the three indices were moving in lockstep; and responding dramatically to each twist and turn of the ongoing eurozone crisis. "Eurozone events and market sentiment determine commodity prices, regardless of trade logistics issues, war, drought and other ongoing supply shocks," Unctad says.

In other words, the financialisation of the market for basic foodstuffs has led to prices drifting far away from the fundamentals of supply and demand, as investors treat betting on the future price of food as just another asset for their portfolio, bringing uncertainty and volatility, and masking the true balance between supply and demand.

When the sub-prime bubble burst, it wrecked the livelihoods of millions of Americans who had battled hard to afford their own home. But in this case, it is the very lives of poor consumers that are at stake, as the price of food zig-zags about because of all-but-irrelevant events in Brussels or Berlin.

Unctad urges the world's regulators to take a series of measures to check speculation. One of the steps it recommends, a financial transaction tax, now looks almost certain to be adopted by a coalition of at least 11 willing European countries, though it seems most likely that trading will simply shift to other jurisdictions – including the UK.

Any tougher crackdown – forcing greater transparency about who is betting on what, with whom, for example – looks highly likely to be scuppered by the same kind of concerted lobbying that sank proposals for regulating other derivatives markets in the years before the crisis.

In the US, for example, the Commodity Futures Trading Commission is facing a legal battle over its attempts to impose "position limits", constraining the share of the market single investors can hold in a number of commodities, including corn and cocoa. The proposal was struck down by a court in Washington, in a case brought by several financial sector trade bodies – though the CFTC has not given up on introducing position limits in some form.

As the world struggles to adapt to a changing climate, and a rapidly expanding population with shifting nutritional needs, it is as important as it has ever been to ensure that farmers, policymakers and consumers are receiving the right signals about supply and demand.

But as we should now have learned repeatedly, allowing the financiers to pile in en masse brings not the hard-nosed judgement of the market, but uncertainty, chaos and confusion.


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