Speculation and food prices

During the food crisis of 2008 when the price of food spiraled out of control causing hunger across the developing world, some financial companies posted record profits from betting on the prices of these very commodities.

Now it looks like these speculators are at it again, gambling on global hunger and contributing to spikes and volatility in food prices, actions that might in turn risk another global food crisis.

The number of speculators in financial markets and the complexity of contracts involving food commodities increased dramatically since deregulation in 2000, providing an opportunity for traders to diversify their portfolios.

President Nikolas Sarkozy has referred to food market speculation as “pillaging” and “extortion”.

Speculators trade ‘derivatives’, contracts that are related to the value of goods but don’t actually involve a physical transfer of goods, in the hopes of profiting from future price movements.  Speculation keeps markets ‘liquid’ and futures markets can potentially help producers protect themselves against changes in value of their goods.

But the U.N. Food and Agricultural Organization (FAO) suggests that the tight link between speculation and price volatility in markets makes it increasingly difficult for producers to use futures markets to actually protect themselves against shocks.  Since speculators trade commodities at prices that rarely reflect actual supply and demand at enormous volumes, they can drive prices up or down at a moment’s notice. High and volatile prices can make big profits for speculators, but can also cause increased poverty.

If just a few speculators can have this great of an effect on global markets, speculation should be regulated to reduce its potentially destabilizing effects on poor countries.

This is why the G-20, led by France, has put the issue at the top of its agenda. Even lobbyists for the French Financial markets have made public their support for regulating the volume of trading that can take place for food commodities and ensuring that speculation doesn’t become excessive.

Creating regulation based on information-sharing and transparency is important for ensuring market stability. Equally important is making sure that developing countries become less vulnerable to agricultural price shocks that are bound to exist even without the activity of speculators. Global leaders need to proactively protect poor producers and poor countries from agricultural price shocks by creating and bolstering safety nets and risk management tools.

Most importantly, donors should fulfill the commitments made at the 2009 G8 L’Aquila Summit towards global food security – providing $20 billion towards agriculture development over 3 years – as an important first step. Donors should provide funding for multi-lateral initiatives like the Global Agriculture and Food Security Program (GAFSP) that support country-led agriculture initiatives and have demonstrated positive results.

As the deadline on L’Aquila draws nearer, we should also look to additional leadership from the French-led G20 in the upcoming Cannes Summit, particularly on the issue of regulation in the commodity futures markets.