THE WORLD Bank is taking the rare step of encouraging developing countries to buy insurance in the derivatives markets against sudden changes in food prices with a deal that should allow the nations to hedge some $4 billion (€2.7 billion) worth of commodities.
The deal, struck with investment bank JPMorgan, comes as countries such as China and India weather a second surge in agricultural commodities prices following the 2007-08 food crisis.
But the initiative, timed to coincide with the first G20 meeting of agricultural ministers, could prove controversial as lawmakers in countries from the US to France try to clamp down on what they describe as excessive speculation in commodities derivatives.
Robert Zoellick, World Bank president, said that the “agriculture price risk management” tool showed what “sensible financial engineering” could do.
“We have been in a period of extraordinary volatility in food prices, which poses a real danger of irreparable harm to the most vulnerable nations,” Mr Zoellick said, adding that food prices were “the single gravest threat” facing developing countries. The facility will target the private sectors of developing nations, including farming co-operatives and food processing companies. JP Morgan would offer simple hedging instruments.
The World Bank will underwrite $200 million in credit risk under the initiative while JP Morgan, will take on a similar amount. – (Copyright The Financial Times Limited 2011)
