Tuesday, September 10, 2013


Food Prices and food insecurity are front page news. Price volatility in food and commodity markets – a marked phenomenon in recent years that has undermined food security – and its causes, including the role of speculation in commodities futures markets. While the impact of increased speculation on prices is still debated, the risks of the formation of price bubbles and the exclusion of commercial players, because of higher costs of participation in a deregulated commodity futures market. Mark Bittman includes this in his news items - "Evidence is growing that financial speculators are responsible for the rising price of food. So the Commodity Futures Trading Commission just released new rules to curb excessive speculation.

When food prices rise, some blame investors. Last year, the German news magazine Der Spiegel published an in-depth article, called Speculating with Lives, looking at what’s driving up food prices. The authors argue that while some of the factors we hear a lot about, such as global warming, biofuels and population growth, are small contributors to rising food prices, they aren’t the main culprit. Instead, the article points a finger at investors who have increasingly fled the financial markets and started trading in commodities such as silver, gold and, yes, food. New IATP Report Shows Excessive Speculation Hurts Farmers and Increases Hunger By Kim Kido – A recent report published by the Institute for Agriculture and Trade Policy (IATP) describes how and why speculative trading has caused agricultural commodity prices to fluctuate wildly, irrespective of actual supply and demand. The report shows how such price fluctuations negatively impact farmers and consumers, and supports regulations that would stop this from happening. "Orthodox agricultural economists denied that the commodity price bubble was due to anything but fundamentals, and both Wall Street and LaSalle Street gleefully cited their work.

David Frenk, former financial analyst and now executive director at Better Markets, Inc., eviscerated such denialist work, published by the Organization for Economic Co-operation and development just before they voted on what would become the Dodd-Frank Wall Street Reform and Consumer Protection Act. Frenk’s work is reprinted here, as is an excerpt from the testimony of Professor Michael Greenberger to the Commodity Futures Trading Commission (CFTC). Greenberger, a former CFTC commissioner, explains important regulatory tools that the CFTC can use to prevent the excessive speculation that induces price hikes and volatility.

IATP began in the midst of a U.S. farm mortgage foreclosure crisis, due in great part to prices - below cost of production -that agribusinesses paid to farmers and ranchers for the raw materials of food products. Even when aided by U.S. taxpayer subsidies, prices were so low that many farmers could not afford to re-pay loans to buy land that they were advised to buy “to get big or get out” of farming. Crops, livestock, meat and dairy products exported at below the cost of production drove farmers in other countries out of business. In 1995, following the founding of the World Trade Organization (WTO), IATP began a decade of nearly annual reporting on the percentage of U.S. export prices for row crops dumped on international markets, i.e., sold at below the cost of production. Although dumping is a patently unfair trade practice under WTO law, the WTO did nothing to stop it. Now WTO negotiations are dead in the water and agricultural commodity prices are high, though not so high relative to agricultural production costs, over which farmers have little control. Land purchase prices and rental rates, and the cost of seeds, diesel fuel and, above all, fertilizer, have increased sharply, partly due to hikes in oil and gas futures prices. But the dominant trade policy discourse no longer is about subsidies and dumping. Instead it is about commodity price volatility and securing raw materials, agricultural, metals and energy commodities, by any means necessary, with trade as just one option. The unvarnished truth of what an UNCTAD economist said to me in 2004 has sunk in more deeply: “I don’t know why you spend so much time on trade policy when the financial system is such a mess.”

The next stage in the fight against excessive and purely financial speculation in commodity markets is perhaps the most important. Rules based on analysis of comprehensive trade data and sound legal reasoning to make markets fair are prerequisite to good enforcement that can manage the price volatility that results from supply, demand and other fundamental factors."  Since all grain commodity futures contracts which are bought must also be sold, speculation should not cause more than short term price changes although it might contribute to volatility. The non-linearity between price and grain inventories during perceived times of scarcity might be the reason that some jump to the conclusion that speculators are causing rapid price rises during these time periods of real or perceived scarcity. However, the regulatory to help protect the food commodities from speculation is counter productive. According to Kay McDonald, the recent history of grain markets supports two conclusions. First, the price spikes of 2008 and more recently are not as unusual as many discussions imply. Second, the balance between consumption, available supply, and stocks seems to be as relevant for our understanding of these markets as it was decades ago.

M Anem
Bella Vista Resort,
Kuah, Langkawi,
(Adapted from

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