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Speculation said to be key driver in food price instability

By Jane Byrne , 14-Sep-2011
Last updated on 14-Sep-2011 at 14:11 GMT2011-09-14T14:11:43Z

A new report from the World Development Movement (WDM) links financial speculation to the rising cost of foods, and calls for effective regulation to curb banks betting on food prices in financial markets.

The publication, Broken Markets, claims the total assets of financial speculators in these markets nearly doubled from $65bn to $126bn in the last five years.

And, in releasing the report, the WDM flagged up recent inflation figures showing UK consumers are now paying over seven per cent more for bread than a year ago.

The UK- based anti-poverty campaigners remarked that while the increase in financial speculation in agri-commodities over the last ten years is clear, the effects that this has had are hotly debated.

Proponents of efficient market theory, continues the WDM, have argued that speculation is inherently stabilising - by buying when prices are low and selling when prices are high their argument is that speculators help smooth volatility in the market.

But the campaigners’ report holds that, in practice, this has not been the case: “Increasing financial speculation has, in fact, distorted prices away from expectations of supply and demand, increased price volatility, and caused the prices of unrelated commodities to move together.”

“These markets are now barely fit for purpose," continued the UK advocates, “both for those who rely on these markets directly and in terms of their devastating impact on food prices around the world."

Moral imperative

Dr Tom MacMillan, executive director of the Food Ethics Council, welcomed the report, saying:

"Although it’s hard to prove conclusively that financial speculation is a key driver in food price instability, many – including the OECD and the FAO – argue that it is.

"Clearly changes in the way our financial system operates are needed. Waiting for conclusive proof of the link between speculation, food prices and hunger is not an option. There is a moral imperative to act now to regulate the commodities market if there is a chance that doing nothing will spark another food crisis."

The US, the European Union (EU) and the G20 are all considering ways to control commodity markets, to ensure their effective functioning and limit excessive speculation.

Price bubbles

While regulating agricultural commodity markets alone will not tackle the many challenges of global food production, Amy Horton, a campaigner for the WDM, told FoodNavigator.com last month that such action is needed "to limit the market share of financial speculators, who are not involved in the actual trade of food at all.

Instead of trading on the basis of information about supply and demand, they are more likely to follow each other, leading to price bubbles,” she added.

Horton said these bubbles are problematic for food producers, who can’t predict what price they’ll earn for their crops, and for European consumers who face higher food prices.

She added: “Food companies have been adversely affected by high and unstable prices too.”

Cocoa and wheat

In recent years, high prices for commodities like cocoa and wheat have attracted considerable interest from speculators, with food industry representatives banging the same drum as tighter regulation campaigners, the WDM.

March this year saw the German sweet industry bemoan what they described as the increasingly negative role of speculators in the volatility of cocoa prices.

"Institutional investors have discovered food commodities as a lucrative investment object in a time of financial crisis," commented the Association of the German Confectionery Industry (the BDSI), adding that the vice-like movement of speculators was placing intolerable stress on that sector.

Allied Bakeries chief executive, Mark Fairweather, speaking at the UK Federation of Bakers luncheon in May, called on retailers there to accept inevitable bread price rises, citing factors such as rising input costs, and, more specifically, pressure from global speculation on wheat.

Managing risk

Its more about managing risk today than it is about buying flour, remarked Fairweather, who said that sharp rises in wheat costs - in particular trader speculation on stocks - was a major problem for the industry.

Nevertheless, some insiders are predicting speculators could exit certain commodity markets,

Earlier this summer, Keith Flury, senior analyst at Rabobank, told sister site confectionerynews.com that, based on the existing market fundamentals, speculators are not interested in investing in cocoa, and he said that scenario is unlikely to change unless next season’s crop levels fall way below current market expectations.

The WDM report Broken Markets can be read here. http://www.wdm.org.uk/sites/default/files/Broken-markets.pdf

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