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Opinion: punters aren't all enemies of the hungry

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Michel Barnier doesn't know his onions.

The man leading a European Union drive to curb speculation in crops, and part of the French cabal pressing for change among the G20 group of economic powers too, appears to believe that his campaign will help the hungry. Such investment is "scandalous", he says.

Such fighting talk is misplaced. It certainly looks morally questionable to profit from punts on soaring food prices. But illiquidity rather than speculation is the enemy of food security.

Jumping bean

That's not to say the current system couldn't be improved. Take cocoa, whose 30% run up between April and July in London, coinciding with a buying spree by Armajaro, does appear to show the influence that a single buyer can have in raising food prices.

The collapse of one-third in cocoa since then, after the expiry of the July contract on which Armajaro focused its purchases, does little to dispel the idea that the trader was key to the rally.

However, that does not mean that the solution is to ban speculators.

Lesson from onions

That's what happened in 1958 in the US which banned onion futures after a rally attributed to a few traders cornering supplies, followed by a bust which ended with the vegetables being worth less than the sacks they were kept in.

Onions remain the only crop in which trading is banned in the US.

But that has not prevented huge volatility in the bulb's prices which, for instance, soared by five times in the year to April 2007 to $76.10 a hundredweight, before halving over the next year, according to USDA data.

Mr Barnier is mistaken if he believes speculators are the problem in crop markets, rather than part of the solution.

Wheat rebound are rises in crop prices. Speculators should not ignore the hardship that higher food prices cause to those struggling to get by. But nor should politicians remain blind to the security to tomorrow's food supplies that today's market rally causes.

Global wheat production, for instance, rose by less than 1% during the decade to 2007-08. In 2008-09, after prices jumped, output soared by 12.8% and remained at a similar level last season.

Higher prices appear to have prompted farmers to produce an extra 145m tonnes of the grain - enough to feed India nearly twice over, and without which world stocks would be looking threadbare now, meaning that Russia's dismal harvest would have had a far bigger impact on prices.

Sure, some of that extra output came at the expense of other crops. But farmers also put vast stretches of marginal land back into production and ramped up spending on sprays and nutrients to lift yields.

Power of money

Indeed, money is the best fertilizer, as those wicked investors say.

Unless his government, and others, are prepared to return to stumping up the cash to persuade farmers to ramp up output, Mr Barnier should think twice about dissuading speculators from putting up theirs.


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