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. 


Nathan Oxley said...

You can download Stephen's working paper here:

Lewis N. Clark said...
This comment has been removed by a blog administrator.
Kevin Duke said...

Being related to a middle class family I wasn’t completely able to form a valuable life insurance due to some family reasons but when I consulted leave assurance dot com site on the internet it became a relief for me!

JamesCapling said...

I was a bit terrified at first place for my home loan but I was really stress-free after they guided me accordingly to the circumstances of my low credit score! Thumbs Up for this JamesCapling!

free credit report gov said...

free credit report gov is the best solution for all those out there suffering because of free credit score issues! This site has helped me a lot and I assure you, it will offer you the same.

pennsylvania insurance agency said...

If you are an internet user on daily basis then must checkout pennsylvania insurance agency. It has been an amazing experience. Believe me it’s totally worth of your time if you are looking to gain insurance!

insurance broker websites said...

- It was really comforting choosing insurance broker websites for the getting insured! We are having the best times and most relaxed times of our life! Incredible!
insurance broker websites

no commission term insurance said...

The counseling was just in time before any more of problems! Everything remains so good with no commission term insurance! I am really glad that I chose them for my work! Amazing!

Eva smith said...

Now I have the best insurance policies which I was looking for almost a decade and believe me I am not regretting a bit! Just going to rate Todd ! Five Stars!

should an insurance company rating system should be stable over short periods said...

What a great amount of knowledge regarding, best possible insurances policies for living a tension free lifestyle and living it to the complete edge! I would ask myself should an insurance company rating system should be stable over short periods! said...

I have seen so many sites but never saw this type of work that has won my heart!!Your dazzling work has won my heart. I’ll come soon to your site with new hope.

Catherine Aird said...

It’s amazing to visit again n again coming to your blogs the superb effort is here.ivf options and costs

payday installment loans said...

Payday installment loans gave me spectacular service! Overall, I had a pleasant experience with them everything went smooth and the communication was great.

Read More said...

I would definitely like to express gratitude the makers of this remarkable website lending and to provide us the comfortability for asking for loans! I am feeling much more relaxed than before!

John Brooks said...

Thanks a lot for this service about niche related wikipedia links Page Rank updates. I would like to suggest it to everyone. They are really amazing.

loans said...

I would definitely like to express gratitude the makers of this remarkable website loans and to provide us the comfortability for asking for loans! I am feeling much more relaxed than before! said...

Remarkable blog! I have no words to praise, it has really allured me. said...

Nice answers in replace of the question with real point of view and explaining about that.

mi band 2 said...

The written piece is truly fruitful for me personally; continue posting these types of articles.

Active Back to Health said...

This blog Info is fabulous; I must wanna see best more from your writers.

coffee lover said...

This article has some vast and valuable information about this subject.

Harry Georje Diamonds said...

Nicest information!!! I'll be enchanted to greatly help due to what I've learnt from here.

T Marano said...

Hi I was searching for the blogs for many times, now I have reached at the right place.

Santa Monica Chiropractor said...

Here at this site really the fastidious material collection so that everybody can enjoy a lot.` said...

It’s amazing to visit again n again coming to your blogs the superb effort is here.

Robert Lima said...

It’s amazing in support of me to truly have a blog site, which will be valuable meant for my knowledge. Thanks admin.Click Here

best mesothelioma law firm said...

It’s amazing to visit again n again coming to your blogs the superb effort is here.

Janie Alabran said...

V Tight Gel is the best solution for vagina tightening available in market. Consist of natural and quality ingredients.

Alex John said...

Incredible Work! Five Stars for lavender essential oil! The results of the oil are great! I would suggest it to every single person out there who is confronting the same health issues!
lavender essential oil

Alex John said...

I became very much attached to mark Gregory and their guidance because it has been a wonderful experience and memorable changeover for my vision!!
mark gregory

Kellyelyi Kemra said...

Where to buy PhenQ with the greatest discount available online? The last thing you want is to take a diet pill that could potentially harm your health. The great thing about PhenQ is that it contains natural ingredients.
PhenQ Diet Pills

Rating said...

I continuously continue coming to your website once more simply in case you have posted new contents.

XnXX Brasil said...

Hey enormous stuff or pleasant information you are offering here.

katy chiropractor said...

You guys present there are performing an excellent job.

Jack Morgan said...

Excellent Blog! I have been impressed by your thoughts and the way you katy homeowners insurance

Dr.Willmar Schwabe said...

Hey enormous stuff or pleasant information you are offering here.katy tx lawn care services

Zara Whitaker said...

Hey enormous stuff or pleasant information you are offering here.divorce attorney houston tx

Mr Hobit Foster said...

I continuously continue coming to your website once more simply in case you have posted new contents.incineration recycling

Mitcheal Clerk said...

Every day I visit a number of blog sites to see content, however this offers quality based

maisiejohn said...

I have checked this link this is really important for the people to get benefit Mini Skirt to buy

John Brooks said...

It’s amazing to visit again n again coming to your blogs the superb effort is here.Debts

Zheng junxai5 said...

michael kors outlet clearance
cheap ray ban sunglasses
tory burch outlet online
ray bans
christian louboutin wedding shoes
montblanc pens
louis vuitton purses
nike roshe one
coach factory outlet online
coach outlet online
polp ralph lauren
louis vuitton outlet online
louis vuitton
oakley sunglasses
air jordan 11
burberry outlet
oakley sunglasses wholesale
longchamp outlet
michael kors handbags
true religion jeans
louis vuitton outlet
hermes birkin handbags
christian louboutin outlet
coach factory outlet
ray ban sunglasses uk
louis vuitton
montblanc pen
louis vuitton handbags
coach outlet online
michael kors handbags
tiffany and co
michael kors outlet clearance
louis vuitton purses
coach outlet
michael kors bags
christian louboutin outlet
jordan retro 11
toms shoes
michael kors outlet

Jennifer Gawley said...

PhenQ Reviews and testimonials of this popular diet pill, PhenQ Scam? Does PhenQ Work? Is it Safe? Don't buy before reading our complete PhenQ reviews.