Food price speculators face appetite for reform

Critics say rampant food speculation is pushing up prices, with devastating economic consequences

Mon, Dec 2, 2013, 01:01

Beginning last year, agents of various finance and investment houses began knocking on the door of the Department of Finance. Something was looming in Brussels and they wanted to ensure officials knew where they stood. The problem had to do with the price of food.

Now that problem – or at least the problematic relationship between food and high finance – is being addressed with EU policymakers deciding on how, or to what extent, to regulate speculation on commodities markets.

Critics insist that growing levels of food speculation, unhampered by strict regulation on a pan-European level, exaggerate pricing, with devastating economic consequences that trickle all the way down to the developing world, in particular.

Conversely, others believe individual member states within the EU should have the power to self-regulate.

One position takes on the mantle of morality, a human right to affordable food and sustainable economics; the other deals with the independence of financial markets and the interests of investors.

In its simplest form, the European Parliament has come down in favour of the former, while a faction within the EU Council is opting for the latter, something interpreted as “light touch” regulation that will continue to push prices up to the detriment of farmers and consumers.

Ireland, it appears, is on the latter side too, along with the UK and a number of other countries. This month the impasse – which makes up one element of the broader revision of the EU Markets in Financial Instruments Directive– was due to be discussed in a problem-solving trialogue with the European Commission in order to try and reach a final position.

US president Barack Obama has already delivered on market reform through the Dodd-Frank Wall Street Reform and Consumer Protection Act limiting the level to which speculators can invest in foods such as maize (corn) and wheat, and thereby helping to control price. Here the debate is raging, despite a global consensus that unbridled speculation has contributed to a crisis in food prices.

Throughout some two years of lobbying on the issue, Denis Naughton TD, a member of the Association of European Parliamentarians for Africa organisation, has appealed to the Minister for Finance Michael Noonan to consider the effects of lighter regulation, independent of stricter EU rules.

In a letter to the Minister, Mr Naughton said: “Financial speculation on food in global markets has made Irish consumers increasingly vulnerable to its effects.

“As disposable income drops for most Irish households, the price of bread and other staples has become crucially important to many families. Inflation led to an average increase of €270 each year in the annual household bill of Irish consumers in the period from 2006 to 2008. The international evidence suggests that food speculation played a significant role in this.”

Globally, Mr Naughton said the effects had “been much more catastrophic”. Between 2007 and 2008, the UN’s World Food Programme reported that some 115 million “more people had been made hungry”.


Spike in food prices
The World Bank, the UN Special Rapporteur on the Right to Food and the UN Conference on Trade, Aid and Development said a major contributor to this was a spike in food prices, he said.

The proposed solution is to support “position limits” that cap the amount a price can fluctuate in one day and addresses what proportion of the market can be cornered by one individual or entity.

Globally, hedge funds and commodity exchange traded funds account for billions of dollars worth of these assets. While there is no scientific proof that speculation affects food prices, it is generally accepted as being the case.

Fintan Conway, head of tillage at the Irish Farmers’ Association, said that futures markets are important and should, to some extent, be maintained.

However, he added: “The key issue is how do you limit the [price] volatility?

“Price volatility has been a pain to everyone’s life over the past number of years. If doesn’t matter if you are the producer or the consumer. We would say that speculative investment extenuates the [price] movement up and down.”

It is believed that Michael Noonan’s position reflects that of the council minority: competent authorities in individual countries can police its own market behaviour. However, the Department of Finance has refused to comment on its position as talks continue.

A recent circular from Somo – a non-profit, research body focused on the economics of sustainable development – said that pan-European limits must be put in place in order to prevent “regulatory arbitrage” where companies take advantage of loopholes in other markets to avoid punitive regulation.

In the EU Council, according to poverty campaigning World Development Movement, the UK is supported “apparently by Sweden, Czech Republic, Hungary, Bulgaria and Ireland (and without opposition from the Netherlands and Sweden)”.

It is not a recent debate. Last January President Michael D Higgins told the “Feeding the World in 2050” conference at UCD that the effect of finance and market speculation on food was a “crucial issue”.

“This new environment of high and volatile food prices calls for urgent measures to protect food security of the world’s poorest food consumers.”


Role of speculators
President Higgins quoted Prof Howard Stein at the University of Michigan, who said that in 2011 it was estimated that some 61 per cent of the wheat futures markets was held by speculators, compared with only 12 per cent in the mid 1990s, prior to deregulation.

Stein said: “The impact on food consumers in poor African countries is well documented.

“IMF estimates that on average the internal price of food rises by 0.33 per cent for every 1 per cent in global food prices. In a survey of 58 developing countries, food prices were up by 56 per cent between 2007 and 2010 putting millions more at risk of undernourishment and malnutrition.”

There has been much lobbying from the financial side too. Last May, Noonan confirmed he had received “50 representations from industry and individuals” dealing with a wide range of points, including position limits.

In July, when pushed to elaborate in a parliamentary question by Andrew Doyle – another vocal proponent of stronger regulation – Noonan identified the parties with whom his department officials had engaged with.

Mainly from the finance industry, those seeking to influence the Government included the Alternative Investment Management Association, the hedge fund industry’s global trade association with more than 1,300 corporate members in over 50 countries; the Association for Financial Markets in Europe; along with Barclays, Goldman Sachs, Morgan Stanley and a number of Irish brokers.

Whatever the content of those discourses, the Association of European Parliamentarians for Africa, following prolonged lobbying, has expressed its disappointment with the Irish position.

“It is a huge let-down that Minister Noonan ultimately favoured a light-touch approach on the issue of food speculation, despite efforts . . . to highlight the disastrous effects of lax regulation on the world’s poorest people, with price volatility of staple foods forcing many into poverty,” said researcher Maeve Howe.

“The decision unfortunately reflects the interests of traders rather than fairness on the whole.”