SOMO in Volkskrant: Speculation is disrupting the food market

SOMO has been arguing for some time now in favour of measures to end food speculation, on the basis of research carried out in 2010. The article ‘Speculation is Disrupting the Food Market’ in De Volkskrant of Saturday 15 January provides an explanation of trading on financial markets in financial agriculture commodity products. SOMO researcher Myriam Vander Stichele gives her opinion in the article.

As a result of excessive speculation, the exchanges on which futures are traded are no longer functioning properly: The prices for agricultural products sometimes no longer bear any relation to the real prices. Food speculation is seen by the FAO as one of the possible causes of the food crisis, as a result of which more than 1 billion people in the world are suffering from hunger.

The Volkskrant article provides a detailed explanation of how financial speculation in food commodities works on the financial markets, what the positions are of the various stakeholders regarding food speculation, and what the possible consequences of financial food speculation are. Taking the typical Dutch breakfast as an example, the article shows clearly how futures contracts are entered into for a wide range of commodities consumed during breakfast, right down to the cotton in the tablecloth. These futures contracts are being signed with the intention of offering a good, guaranteed price to the farmer or a guaranteed delivery at a good price to those processing the harvest

The futures contracts which farmers have entered into are traded around the world. In the article, Vander Stichele explains the role of investment banks in this trading of futures and related derivative contracts. For example, they offer institutional investors and hedge funds the option of investing in index funds – a basket of futures contracts in raw materials, consisting to a large extent of minerals and oil or gas, but which also include agricultural products. In the past five years, the trading volume for index funds has grown from $13 billion to $260 billion. Private individual investors can also invest in a similar type of investment fund, for instance exchange traded funds (ETFs), which are listed on the stock exchange. According to Vander Stichele, this leads to the danger that these investment funds have to buy up more futures contracts in order to cover the investments made by the customers of these investment funds. This then drives up the price of futures contracts on the exchanges. Meanwhile, customers have to pay all sorts of transaction costs to the banks. The scale at which all the speculative trade in futures contracts and other food commodity derivatives as well as investment instruments is taking place, and how much profits are being made, is opaque, according to SOMO’s Myriam Vander Stichele, because part of the trade takes place away from the stock exchange (‘over the counter‘or ‘OTC’). "In view of the large bonuses which are again being paid out, you can assume that their profits have been sizeable," according to Vander Stichele in the Volkskrant.

Opinions are divided on the effects of the speculation on prices, because production is also under pressure in various places, while little is known about what the physical commodity reserves are. The fact is that the prices of grains, cocoa, coffee, soya, sugar and other agricultural products are only rising at the moment.

At the same time that this article was published, the chairman of the Unilever board of directors Paul Polman said in an interview in the British newspaper The Sunday Telegraph that he sees the rise in food prices and speculation on the food markets as a threat. He has raised the issue of trade by speculators at the European Commission, and wants speculators to be forced to make their positions, i.e. the level of their involvement in food commodity derivatives, public. However, Myriam Vander Stichele thinks that Unilever’s proposal to make the market more transparent does not go far enough, and is calling for various measures to prevent financial speculation having a negative impact on food prices. The European Commission, the European Parliament and the Council of Ministers of Finance must decide this year on measures to end speculation on food commodities, and SOMO is working with other organisations to stimulate the public and political debate on the issue.

Further reading:

• article in De Volkskrant: Speculation is disrupting the food market(opens in new window) (in Dutch)
• article in The Sunday Telegraph: Davos 2011: Unilever’s Paul Polman believes we need to think long term(opens in new window)

For more information, please contact Myriam Vander Stichele