It is wrong to
blame speculators for the extent of the rally in food prices.
Sure, they are an
attractive target. Hedge funds and the like are hardly famous for moral
investment choices. It strikes an appealing chord to accuse them of stoking
world hunger too.
And, at first
sight, the case against them looks cut and dried. Speculative investments in
pump extra money into food markets, which drives prices out of the reach of
those who need it most, right? The unthinkable pursuing the edible, in fact.
It is not
surprising that the campaign to divorce investors and agricultural commodities
has gained traction, prompting retreats by the likes Commerzbank and
Volksbanken, and a rethink by Deutsche Bank, and that the Vatican has renewed attacks on speculators.
Supply and demand rule
speculative money flows will, like any other, play some role in altering the
day-to-day moves in the agricultural commodities market, to accuse them wholesale
distortion is misplaced.
For a start, it is
not clear that there is a case to answer that food prices are artificially high.
For food prices to be more expensive that supply and demand fundamentals
suggest would be to incentivise farmers to grow crops to excess, as in Europe
in the days of butter mountains and wine lakes.
Excess is hardly
the issue for crops such as corn and soybeans whose expense is causing such
Indeed, it is a sufficient
explanation for record high soybean prices in Chicago that US inventories of the
oilseed are forecast to end 2012-13 at the equivalent of 15 days' use, the
lowest in 48 years.
Lessons from onions
Nor have recent
price rises been limited to crops in which speculators invest.
Sure, corn prices
up 15.5% in the US cash market in July, and soybean values up 12.2%, as shown
by US Department of Agriculture, are difficult for users to swallow.
But prices of
onions rose even more sharply, by 24.0%, while celery values have soared 85.2%.
Onions have a
special place in the debate over food speculation, being one of the few
commodities in which speculators are just unable to trade in futures but
banned, after unquestioned market manipulation led to the US outlawing trading
The value and
volatility of onion prices continued to rise after the ban was imposed. And volatility
was greater than that of corn in the first decade of 2000s too.
'Not hugely culpable'
may in fact be allies in the battle to contain food price volatility, given
their willingness to take short positions when they consider values as unduly
high, and act as a force for stabilisation.
Christian Aid, a
major agent in the battle against hunger, said so itself, in a report last year,
which found that short-term investors "do not appear to be hugely
culpable" of artificially inflating prices.
Through taking counterintuitive
positions, buying on weakness and selling on strength, speculators can dampen
market volatility, the briefing said.
This is not so say
that speculators have never been guilty of market manipulation. The onion
market is not the only one to have witnessed questionable position taking.
It is not unreasonable
that speculators should have their food investments subject to limits, and face
obligations for reporting positions.
But while banning
speculators may have political appeal, it is not clear it would have any impact
on quelling food price spikes. It offers a big risk of making matters
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