Friday, 25 January 2013

Should we forget about financial speculation and food prices?

By Stephen Spratt

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.” 
John Maynard Keynes

On Wednesday the IF campaign was launched in the UK by a group of 100 NGOs. Timed to coincide with the UK’s Presidency of the G8, the campaign seeks to address the causes of global hunger. The focus will be on four areas:
  • finance for small-scale farming and maternal and child nutrition
  • land grabs and biofuel production
  • tax evasion
  • government transparency.
These are clearly vitally important issues for dealing with global hunger and malnutrition, and the campaign deserves real credit and support for trying to get at underlying causes rather than concentrating on symptoms.

What is also interesting, however, is what is not there. The campaign addresses the problem of high and volatile global food prices through land-use – i.e. reducing both ‘land grabs’ and biofuel production to increase the supply of food.

Not so long ago, however, the influence of financial speculation on food prices would also have figured prominently in many people’s list of ‘villains’. The fact that this is not so implies that this is no longer a problem, or perhaps never was. Should we forget about this issue then?

I would suggest that the answer is no: while the case is not proven, the jury is still out.

Food prices
2012 saw the worst drought in 50 years in the United States. Other major food producers also experienced an unusually dry year, severely affecting harvests. As prices began to move upwards last summer, many predicted a price ‘spike’ like those seen in 2008 and 2010. In an attempt to avert this, the French President called a meeting of the G20 Agriculture Ministers for mid-October under the banner of the Rapid Response Forum (RRF), established after the last price spike.

Rather than continuing to rise as expected, however, the prices of key food commodities either stayed flat or were falling by September. Some pointed to the role played by the new Agricultural Market Information System (AMIS) in providing accurate information on supply conditions, arguing that this prevented markets becoming spooked. Major producing countries did not impose export bans, and the chunk of the harvest gobbled up by biofuels was also less than in previous years. Collective sighs of relief were heard. The crisis was averted. The emergency RRF meeting was cancelled as ‘it was unnecessary’ – food commodity markets were, we were told, ‘functioning well’.

Financial controls
2012 also saw the US Commodity Futures Trading Commission (CFTC) seek to impose restrictions on financial ‘speculation’ in food markets. The focus was the introduction of ‘position limits’, which limit the proportion of the market that can be held by any one institution. Although the limit still allowed up to a quarter of the market to be so controlled, it was still met with fierce lobbying from the financial sector. This culminated in a Federal District Court judgement in September, which went against the CFTC. The ruling was that the CFTC needed to show that position limits were needed to reduce market instability and volatility, and had failed to do so.

For some, we can relax: measures taken after the last food crisis work – those who had predicted a crisis in 2012 were wrong; critics who suggested that the huge increase in financial speculation in commodity futures markets in the last decade had driven up the level and volatility of prices were also wrong; all that was needed for markets to work well was better information (i.e. AMIS) and coordination to prevent things like export bans (i.e. the RRF). Controls on financial speculation were unnecessary and likely to be counterproductive: far from increasing volatility and moving prices away from ‘fair values’, speculators stabilise markets by increasing liquidity, and aid ‘price discovery’ by buying undervalued, and selling overvalued, assets.

While some accept this view in its entirety, most are less sanguine. The CFTC is appealing against the court ruling, arguing that position limits are designed to prevent market manipulation, which is crucial for markets to function properly. The European Union plans to implement a similar measure in its review of the Markets in Financial Instruments Directive (MiFID) . Outside of the financial lobby, almost everyone agrees that controls on the ability of institutions to exert too large an influence – and potentially manipulate – markets are desirable. Others would go further.

If one thinks, for example, that markets are prone to periodic bouts of ‘irrationality’ – even with good information, and in the absence of abuse – further measures are likely to be required. In September 2012, for example, Members of the European Parliament voted to impose short delays on computerised, high frequency trading in food commodity markets, arguing that this kind of trading is likely to increase volatility. Others, such as the World Development Movement (WDM) , have called for the total amount of financial ‘speculation’ in the market to be restricted. The argument is the same as that used by Keynes in the quote at the start of this article: too much financial speculation relative to trading based on ‘real’ economic activity is likely to destabilise markets.

The UN’s Special Rapporteur on The Right to Food made a similar argument in 2010:
A significant contributory cause of the price spike was speculation by institutional investors who did not have any expertise or interest in agricultural commodities, and who invested in commodities index funds because other financial markets had dried up, or in order to hedge speculative bets made on those markets.
In a series of papers, UNCTAD have pointed to the increasing correlation between commodity prices and those of other financial assets. Ten years ago, there was little relationship between movements in European stock markets, the price of crude oil in the US, and a global diversified commodity price index. The picture today is very different:
...the financialization of commodity markets reveals a dramatic change. Despite the similarities in 2002 and 2012 in terms of real shocks – insecurity in West Asia, the aftermath of a stock market crash and a difficult cereals harvest – the evolution of the three indices could not be more different. Ten years ago each market had its own dynamics, but in 2012 they are moving in nearly perfect tandem.
UNCTAD’s point is subtle but important. Rather than being driven by supply and demand conditions in the real economy, food prices are increasingly determined by events in other markets. The common factor is finance.

So who is right, and does it matter? 
Despite the circumstantial evidence, it has not been possible to prove a link between increased speculation in food futures markets and spot market prices. People who work in these markets, however, are generally in no doubt that such a link exists. Even if there was a link, however, would this be a problem? Well, this comes back to your view of how financial markets work. Financial speculators could help stabilise market prices around ‘fair values’ that accurately reflect economic fundamentals, or they could increase volatility and drive prices away from these values.

On this question, the evidence presented in my recent paper, Food price volatility and financial speculation, suggests that UNCTAD may be right: the risk of heightened volatility and inaccurate price signals resulting from the financialisation of food markets is very real, even if markets appear to be working well today. After all, before the crisis of 2008 there was much talk of how sophisticated and efficient global financial markets had become, and how market prices could now instantly adjust to accurately reflect changing ‘economic realities.’

The final question is whether more volatile or inaccurate prices matter much. Here the answer is clear. Food markets are different to other financial markets. Stable prices that send accurate signals are of fundamental importance to the lives of billions. Set against this, the ‘costs’ of placing some curbs on speculation, which in the end may be no more than a reduction in the profitability of some financial institutions, are trivial. 

Tuesday, 22 January 2013

A measuring stick for good businesses in development

By Noshua Watson

The Initiative for Global Development (IGD) is a network of Fortune 500 CEO-types who are interested in making investments in Africa and other developing regions. Their July 2012 report, “The Business Case for Development”, claims three ways that business can lead to development: achieving growth, improving efficiency, and enhancing the operating environment.

This is a rather interesting way of framing the role of business in development. We know a lot about how business can lead to economic growth (employment, taxes, innovation, investment, creating new markets) and not as much about the extent to which they improve efficiency or enhance the operating environment. In fact, much of the case AGAINST business in development is about how larger companies may stifle smaller, local ones or how corporate activities destabilise fragile regimes.

That said, what if we took businesses at their word and held them accountable to these criteria? Of course, the development community should continue to monitor the human development impacts of achieving growth, increasing efficiency or enhancing the operating environment.  But shareholders and stakeholders alike would benefit from businesses meeting the IGD’s claims that businesses achieve growth through product innovation and development and marketing; or improve efficiency through better supply chains and local workforce development or enhance the operating environment through stakeholder dialogue and stability, increased institutional capacity and better governance.

This criteria is also be a useful litmus test for governments. In fact, we already rate them in several ways (e.g. the World Bank Doing Business index,  the Legatum Prosperity Index) by the extent to which they create the environment for businesses to generate growth, efficiency and better operations. So why not evaluate businesses by those standards too?

Thursday, 17 January 2013

Is small the best size for nutrition? The success and challenges of weaning food businesses in Ghana (part one)

By Ewan Robinson

As nutrition moves up the agenda of development organisations, donors are on the lookout for nutritious foods. And they want models of businesses getting healthy foods to the people who need them, all without requiring too much outside investment.

In previous posts, we’ve seen how big business is getting involved in addressing undernutrition, by selling products to poor consumers or marketing to emergency relief agencies.

On a recent trip to Ghana, I learned about a success story featuring businesses that are much smaller.

Weanimix: From nutritious idea to popular business model

Helena Akua Afriyie sells a variety of complementary foods and flours at Kejeita Central Market in Kumasi, Ghana

This emerging success involves hundreds of micro businesses producing ‘weanimix’, a porridge-like complementary food fed to infants as they transition from exclusive breastfeeding to eating solid foods.

In Ghana, mothers conventionally fed their children complementary foods made with flour from cereals. A common mix made with roasted corn is known as Tom Brown. But there’s a problem with these traditional mixes: they lack the proteins and micronutrients that babies need during weaning, a crucial period when undernutrition can affect a child’s development and lifelong health.

Because of these deficiencies, the Ghana Health Service and UNICEF began teaching women’s groups how to make a modified weaning food recipe during the 1980s: the new mix combined 4-parts cereal (maize) and 1-part legume (soybeans, cowpeas, and groundnuts). The legumes added protein crucial to infants’ health. The new recipe, called ‘weanimix’, quickly spread across Ghana.

Flash forward 25 years, and weanimix has gone from nutrition education to a viable business model, with products sold at markets and shops across Ghana.

What’s interesting is the way weanimix spread: Ghana Health Services and NGOs provided training as a key element of ante natal care; but at the same time women told their relatives and neighbours about it. Some built small businesses preparing weanimix and selling it in their neighbourhood or at local markets.

Today, some of these kitchen enterprises have grown into substantial food processing businesses, and a variety of weanimix brands can be found in supermarkets and open markets.

Is small business more complicated? Challenges of regulating nutrition content and earning consumers’ trust

But the large number of businesses and the small scale of their operations also makes it difficult to assure consumers of the nutritional value of weanimix. The Ghana Food and Drugs Board is in charge of regulating nutrition information on food products. But they struggle to track and test so many products and small producers.

All these products create a problem for consumers too. A recent study from the International Growth Centre showed that not all weanimixes are created equal: there are big differences in their nutrient content. Some contain much less than what infants need. Another study (pdf) shows that without fortifying weanimix with micronutrients (vitamin A, iron, zinc), the standard recipe does not meet infants’ needs.

So how do consumers decide?

First of all, many consumers are unaware of the nutrition needs of infants – they may not even know to look for a healthier weaning food. They are more worried about whether their baby will eat it.

But even if they are looking for nutrition, consumers may not trust the claims on the package. While some weanimix packets have a nutrition label like in developed countries, others simply say they contain ‘energy, protein, vitamins’ or feature an image of a smiling baby. Some mixes are sold in unlabelled sachets. So consumers probably rely on the advice of neighbours or the person they buy from.

These reasons help explain why weanimix is available from only a limited number of shops and market vendors. According to one consumer survey, most women continued to use cereal-only weaning foods.

How can we build value chains for nutritious complementary foods?

So how do we address the challenges of nutrition in the marketplace for weaning foods? Can consumers trust these products to help their babies be healthy?

And can we create incentives for businesses to produce nutritious foods for the people who need them?

For now, I’m going to leave you with a shameless plug for my next post. Tune in next week for a look at a couple of interesting efforts to improve the weanimix business in Ghana. We’ll see that these models tell us a lot about what businesses can and can’t do for nutritious foods.

This post is based on research co-authored with Dr Henry Anim-Somuah of the Department of Agricultural Economics at the University of Ghana, Legon.

Picture credit: Ewan Robinson

Friday, 11 January 2013

A year of growth: How the Globalisation team developed in 2012

By Spencer Henson

We may be half way through January, but as the first blog post of 2013, I wanted to reflect on the accomplishments of the Globalisation Team, at IDS in 2012. When you are leader of a team it is all too easy to get caught up in day-to-day management issues and income targets and miss the great work of your colleagues that is making a very real contribution to international development.

I have focused on the ‘big’ ideas and fast moving issues where I feel the team has been at the forefront of ongoing debates. I also see these areas of work as being of prominence in the coming year:
  • In 2012, Oxfam launched its latest campaign GROW. It asks how we can grow more food more fairly and more sustainably in the face of growing global demand as world population continues to expand and incomes rise in the emerging economies. This is not a new question, but it is one that requires immediate attention and varied responses, guided by rigorous analysis. Dirk Willenbockel contributed to this with his vital paper on Extreme Weather Events and Crop Price Spikes in a Changing Climate.
  • At the forefront of development discourse is the growth of the BRICS and other rising powers and the implications for international development. For example, China, India and Brazil are increasingly important providers of development assistance to a number of low and middle-income countries, challenging the role of the traditional donors. There are also debates about the transferability of the development ‘models’ of the rising powers to other developing countries, for example in sub-Saharan Africa. Leading this discussion is the Rising Powers in International Development Programme, convened by the Globalisation Team’s Lizbeth Navas-Aleman and Alex Shankland in the Participation, Power and Social Change Team, and building on the long-standing work of team members in this area, for example Jing Gu on China and Lizbeth on Brazil.
  • Also grappling with a major global challenge is Hubert Schmitz.  He presented a lauded Members Seminar at IDS in December on Accelerating the Green TransformationWhat is the green transformation? Well, similarly to the ‘great transformation’ it is a restructuring of the global economy, however, this transformation, argues Hubert, is non-negotiable, and needs to be undertaken proactively and in a way that respects planetary boundaries. The scale of this challenge is clear, as is the need for thoughtful analysis, such as that being provided by Hubert.
  • An increasingly dominant issue in international development is the role of non-state actors. This is both welcome and overdue; arguably, inordinate emphasis has been placed on the role of government for far too long. The focus of work in the Globalisation Team, and especially by Noshua Watson, has been on the role of business and private foundations. For example, Noshua’s policy brief on Private Foundations, Business and Development a Post-2015 Framework highlights the need to consider private foundations and business in development discourse especially as we move to the post-MDG era and questions to align the different motivations and values of these actors with development objectives. The leadership of the Globalisation Team in the recent establishment of the IDS Business and Development Centre (BDC) should ensure that we continue to play an active role in these debates.
  • Over the last year, a number of team members have been working in the area of nutrition, and have plans for significant up-scaling of this work in 2013. Stephen Spratt’s work with Action Against Hunger explores the potential role for innovative finance to support nutrition programmes in developing countries.  John Humphrey and I have continued our work with the Global Alliance for Improved Nutrition (GAIN) on integrating agriculture and nutrition. A major focus of this work has been on identifying opportunities for business investment directed at making nutritious foods accessible to the poor.
  • There have long been claims that trade can play a key role as a catalyst of processes of economic development. Whilst much of the focus has been on aiding developing countries to gain access to potentially lucrative markets in the North, increasingly attention has turned to so-called South-South trade. Analysis by the Globalisation team has highlighted the challenges in promoting trade between developing countries. Notable in the last year, Xavier Cirera completed research with Trademark East Africa on how to make regional integration in the East Africa Community (EAC) work, exploring the distinct challenges faced by countries in the region.
In drawing attention to the accomplishment of your colleagues there is always the fear that you will miss something, however, I think the above will give you a good sense of our future, and our vision for change. If 2012 is anything to go by, there is much to look forward to in the coming year.