Not a Game: Speculation vs. Food Security (1-3)
Regulating Financial Markets to Grow a Better Future
Food prices are a matter of life and death to many in the developing world. Financial markets that should be helping food growers and processors to manage their risk and set prices have become a potential threat to global food security. Deregulated and secretive agricultural commodity derivatives markets have attracted huge sums of speculative money, and there is growing evidence that they deliver distorted and unpredictable food prices. Financial speculation can play an important role to help food producers and end users manage risks, but in light of the harm that excessive speculation may cause to millions, action is required now to address the problem. This briefing explains what has gone wrong with financial markets and what the United States, the European Union and other G20 members should do to fix them.
Few things seem more remote from the real world of agriculture than financial traders working in the skyscrapers of Chicago, New York, London or Paris. And yet ever more of the financial products they buy and sell are linked to the food we eat. They are derived from underlying agricultural commodities such as wheat, corn, soybean or sugar. Historically these so-called „derivatives? were designed as an innovative way of dealing with the risky business of growing and selling food. However, the balance has shifted, and transactions on markets in agricultural derivatives are increasingly made without reference to the dynamics of markets in actual food. Banks have used new types of derivatives to attract players – pension funds, hedge funds, sovereign wealth funds – which invest without any interest in the underlying agricultural commodities. Multinational agricultural commodity traders, which have long controlled the global grain trade, have developed new business lines selling financial services to profit from this new trend. Agricultural derivatives, which used to be closely linked to the realities of buying and selling food, have now become highly financialized?.
At the same time, agricultural markets have become increasingly unpredictable. High and volatile food prices have caused two global food price crises in three years. Both crises had dramatic consequences in many poor countries: increased hunger, conflict and instability. The 2008 spike in food prices pushed 100 million people into poverty, and by 2009 the number of people hungry passed one billion. The World Bank estimates that 44 million more people fell below the poverty line in the last half of 2010 as prices climbed back to levels close to the 2008 peak. „The modern trader is playing the most sophisticated, dynamic, immersive game in the world. … The difference here being, of course, that it's all real. Those flickering prices the trader attends to are not just big, but bloody, too.?
Food price spikes hit the poorest hardest
Poor people can spend up to 75 per cent of their income on food and often depend on food assistance. High and volatile prices hit these people hardest. Governments and aid agencies dependent on imports from international markets find their food aid budgets support fewer hungry people. The multiple strategies that poor people adopted in response to the food price crises have had lasting effects by forcing people to change their diets, to sell productive assets, to incur debt, to withdraw children from school, to marry early and to migrate to areas where food might be available. Women have been at increased risk of domestic violence and children at risk of stunting and arrested cognitive development.
Financialization of agricultural derivatives means that they are no longer working, as initially intended, to help food producers, processors and end users deal with the vagaries of physical markets. Even worse, there is an emerging case for the existence of a link between increased speculation6 and higher volatility and, in some cases, higher prices in physical markets in food. The precise impact of speculation on food prices today remains disputed and cannot currently be proven, not least because of the lack of transparency of financial markets. However, this should not preclude action on the basis of legitimate and well-founded concerns. The response to food price volatility will need to be comprehensive, and must include actions ranging from tackling climate change and extreme weather events, to removing government policies diverting food into (bio) fuel, to regulating the ability of large food producing countries to slap on export bans when prices go up. And because food price volatility can be a matter of life and death, a precautionary approach must be taken to speculating on agricultural commodities. Governments must act, domestically and together through multilateral mechanisms, to prevent harm by curbing excessive speculation through greater transparency and regulation.
New rules required: will the US, EU and G20 deliver?
New rules are needed to deal with the new reality of financialized markets in agricultural derivatives to allow them to work for their most important stakeholders: food producers and consumers. The battle between those in favour of effective regulation and those with a vested interest in the status quo – including the powerful exchanges, investment banks and food trading companies – is raging in the United States and the European Union. Meanwhile, France is attempting to forge a consensus on the need to regulate at G20 level.
When President Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law in 2010, the United States took the lead in turning back deregulation and reforming financial markets. The Dodd–Frank Act directs the regulatory agency in charge of commodity derivatives markets, the Commodity Futures Trade Commission (CFTC), to issue regulations that cap the size of bets that can be made in the „futures? market and the number of futures contracts a market player may hold („position limits?) in order to diminish, eliminate or prevent excessive speculation as appropriate?. Disputes over the interpretation of this mandate – with strong opposition from banks, hedge funds and traders – is creating uncertainty about its full implementation. The CFTC is tasked with resolving these disputes; their ruling will determine to what extent the Act will help to effectively regulate excessive speculation.
The EU has lagged behind in its efforts to regulate commodity derivatives markets. The fate of the European Markets Infrastructure Regulation (EMIR), which aims to increase transparency by moving over-the-counter (OTC) derivatives onto exchanges, remains to be decided by the European Parliament and the Council. A reform of the legislation regulating exchange-traded derivatives, the Markets in Financial Instruments Directive (MiFID), has been announced by the European Commission and is likely to include position limits. However, European governments are divided over the merits of such measures and could block them.
French president Sarkozy has made regulation of commodity speculation one of the top priorities of the 2011 French presidency of the G20. Agriculture ministers have called for more transparency and better regulation, but it remains to be seen if a consensus will emerge at the level of finance ministers and heads of state. Failure to agree on the need for new rules would put into question the central role the G20 claims to play in international economic cooperation.
By Alula Berhe, 02/12/2011