Banks, hedge funds and pension funds are making huge profits gambling with food prices in unregulated financial markets. Food speculation leads to volatility and increase in global food prices, leaving nearly 1 billion people around the world facing hunger, malnutrition and greater poverty. Viviane Stroede investigates what major European investment banks are involved and what impact food speculation has on the consumer.
In 2007 and 2008 increasing food prices led to spikes in global famine. According to the Food and Agricultural Organization of the United Nations (FAO) food prices increased by 71% from 2006 to 2008. In 2009 prices fell again only to increase in 2011 to the heights reached in 2008. Rising demand, higher production costs due to increased prices in oil and fertilizer, as well as bad harvests and higher concentration on bio-fuels production were seen as the reasons for the increasing food prices. Though the extreme peaks can not only be explained by those factors alone but the excessive and unregulated speculation on food in financial markets. According to Marc Olivier Herman, EU Policy Advisor for Oxfam, there is “increasing evidence to say that speculation on agricultural commodities is a serious part of the problem and has driven volatility of the prices on the food market. Massive inflow of money from investors seeking to diversify their investments and them treating food as another financial product has really caused serious problems.”
Food speculation works on the basis of investors buying ‘futures’ which are traded on the commodity exchange market. ‘Futures contracts’ were first created in order for producers and processors of raw materials to be able to sell their products for a guaranteed price at a future date and therefore avoid sharp price fluctuations. To buy those ‘futures contracts’ it was not necessary to trade actual food, so more and more financial players entered the market to profit from these contracts. Since the deregulation of the financial markets in the 1990s, commodity future exchanges went a long way, from originally aiming to hedge prices, to instruments for capital investment. By investors using commodities like food as capital investments, they create an elusive high demand for goods over a long period of time, which leads to food prices being higher than they would be without these financial investments.
You can find more information on food speculation in the following report made by foodwatch in 2011: http://www.makefinancework.org/IMG/pdf/foodwatch-en_rohstoff-report_ger.pdf
According to Christine Haigh, Food and Finance Campaigner at World Development Movement, there has been “a big increase in financial speculation on food prices, where banks and other financial institutions trade ‘futures’ or other financial contracts for food. By trading these contracts in large quantities investors are increasing food price volatility and contributing to some of the big price spikes we have seen in the last few years. In 2008 there was a major spike in the price of food and colleagues of mine visited Kenya to talk to people about the impact the high food prices had on them. They heard about how people had to go without food so they could feed their children. We heard stories about people becoming malnourished, people having to cut back on spending on health or education. People literally are just going hungry.”
870 million people around the world do not have enough to eat and developing countries are hit the hardest by the rises in food prices. While industrialized country households spend an average of 10 – 20% on food, people in developing countries spend around 50 – 80% of their income on food.
According to Herman “everybody is affected by prices on global markets, but the impacts are different. In countries where you have a population that is poor and these countries are food import dependent the consequences for the population can be very dramatic. Increased food prices are not threatening our livelihood [developed countries] as it is the case in poor developing countries.”
Talking to David Hachfeld, Trade Policy Advisor at Oxfam Germany, he stated that “the future exchanges in Europe are not as developed as those in the US. This has a lot to do with common agricultural policies in the EU, which was a strongly regulated market, with a lot of political interventions. Therefore the future exchange played a minor role. This is slowly changing now, so we see bigger rates and bigger amounts of capital flowing into the European market.”
Some of the major banks and investors involved in Europe are Allianz, Generali, HSBC, Credit Suisse and Deutsche Bank.
Klaus Thoma, working in the Press and Media Relations of Deutsche Bank, stated that “the agricultural commodities sector has been the subject of controversial discussions for some time now. Deutsche Bank set up a working group to analyze the role financial investor’s play on the commodity futures markets already in 2011. After evaluating numerous studies on the matter, the working group established that there is little empirical evidence to support the notion that the growth of agricultural-based financial products has caused price increases or volatility. At the same time, it confirmed that agricultural commodity-based futures markets offer substantial benefits to farmers and processors. Thus, Deutsche Bank’s Management Board decided to continue to offer financial instruments based on agricultural staples. “
Though still in the last year banks such as Landesbank, Commerzbank, Volksbank and Nordea Bank AB have reduced their involvement in food speculation or fully pulled out. Recently also Barclays announced their withdrawal from food gambling, though according to Christine Haigh they still “offer opportunities for institutions like pension funds to speculate on food prices.”
“We should not think that because a few banks are becoming a bit more ethical therefore the business is going to regulate itself. No, the competition is there between financial players and the bottom line is there. If financial players can make a profit they will and they may well go back to the practices later on even though they have pulled out. The conclusion that we should draw from that movement from these banks is that there is a real link between speculation and food price volatility that must be regulated rather than the financial sector starting to regulate itself. “, stated Marc Olivier Herman.
Currently the European Union is discussing a new legislation to tighten the rules on speculation. At present the draft of the Markets in Financial Instruments Directive (MiFID) is still in negotiation within the EU. These rules aim to limit the amount of ‘futures’ an individual company is allowed to trade in order to lower the size of investments. According to Herman the legislation “can do two things: it can stop people being pushed into poverty in developing countries and on the other hand it can restore the markets to their true purposes.” Although according to Hachfeld there are “signs from banks trying to water down the regulations, we also see banks stepping out from this business.”
Here you cab find more information on the Markets in Financial Instruments Directive: http://www.oxfam.org/en/grow/policy/not-game-speculation-vs-food-security
Roger Waite, Spokesperson for Commissioner for Agriculture and Rural Development Dacian Cioloş, stated that “food speculation should not threaten the economic viability of otherwise profitable farms. The Commission has already taken a series of initiatives against the volatility of food prices and will continue to do so, at both EU and global level. Farmers are already confronted to the challenges of oil prices, climate change and extreme weather events, they will have to feed 9 billion people in the world in 2050. We cannot afford to leave them at the mercy of irrational speculation.”
It becomes clear that the financialisation of food commodities has caused a lot of harm for producers, processors and consumers around the world. Investors are gaining from gambling with one of the most important necessities of life. The problem itself starts with the fact that there is a lack of transparency evident in the financial market, making it hard for consumers to directly approach the core of the issue. Although food speculation is presently not illegal in Europe, investment banks around the world are acting morally wrong at the cost of millions of people around the world struggling with poverty.
For further information:
World Development Movement http://www.wdm.org.uk/food-speculation
A report by Weed: http://www2.weed-online.org/uploads/weed_food_speculation.pdf
Olivier De Schutter, United Nations Special Rapporteur on the Right to Food: http://www2.ohchr.org/english/issues/food/docs/Briefing_Note_02_September_2010_EN.pdf
An Oxfam issue briefing on food speculation: http://www.oxfam.org/sites/www.oxfam.org/files/ib-speculation-vs-food-security-031011-en.pdf