Last Wednesday, a letter signed by nearly 500 of the world’s most prominent economists was presented to the G20 finance ministers, who were engaged in talks in Paris. The letter urged ministers to take action to rein-in financial speculation in commodity markets, which is driving up food prices across the globe. image expired

Food may seem an unlikely target for high-finance, however, since the financial crisis in 2008 other markets are no longer as lucrative and investment banks and hedge funds have turned their attention to food derivatives in the hope of growing their money. Although speculators deny they have a negative influence on food prices, since the increase in attention food prices have shown more volatility and staples have risen to record highs.

The price of wheat has rocketed and slumped again and the price of maize has trebled in the last six years. Such volatility is undoubtedly affecting the ability of the world’s poorest to purchase food. The economists who signed Wednesday’s letter believe commodity speculation is "exacerbating global hunger and poverty."

The move to introduce regulations to curb excessive speculation has become something of a cause célèbre in recent months, with support for new regulation coming from such unlikely parties as the Pope and Starbucks CEO Howard Schultz. Supporters of the increase in regulation claim new laws could radically reduce the cost of living for people around the world, including the UK, where food prices continue to rise.

US and Europe to announce legislation this week

This week, after the G20 debates come to a close, both the USA, which already has tighter controls than Europe, and the EU are expected to announce legislation to deal with the influence of speculation on price volatility of staple food derivatives. The G20 ministers are also due to report back this weekend on limits on financial players in commodity markets.

As part of its presidency of the G20, France has pledged to take action on speculation which drives up food prices. French premier Nichoals Sarkozy proclaimed at the outset of talks in June, "A market that is not regulated is not a market but a lottery where fortune favours the most cynical instead of rewarding work, investment and value creation." He expressed high hopes for the move to increase regulation, "By addressing the volatility of agricultural markets, in assuring food security for the world for today and tomorrow, we will rebalance the structure of capitalism."

However, staunch opposition to these plans has come from Britain, the US and Brazil. As a result, during the first G20 Agriculture talks in June, France’s proposals were effectively derailed and the G20 committed to a watered down set of measures, including increasing transparency with a new database and removing export barriers to food aid, to curb volatility.  

The Commodities Futures Trading Commission (CFTC) - the US regulatory authority - is due to announce caps for traders’ holdings in commodity markets. On Tuesday (18th October), having twice delayed issuing a ruling due to pressure from excessive lobbying by major banks and large traders of commodities, the CTFC is expected to unveil the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will put limits on financial speculation.  

Two days later in Europe, the Commission is due to make an announcement on the MiFID (the ‘Markets in Financial Instruments Directive’), its own Dodd-Frank Act. However, they too have faced concerted lobbying and, reporting on the forthcoming legislation, New Internationalist’s Hazel Healy posited that, though the Commission has pledged action, "It remains to be seen how much of this rhetoric will translate into regulation."

Global Hunger Index lays blame with biofuels industry and financial actors

The International Food Policy Research Institute (IFPRI), which aims to seek sustainable solutions to end hunger and poverty, has laid the blame for hunger and threats to food security on the demand for biofuels, extreme weather and climate change, and increased financial activity through commodity futures markets. According to the institute’s 2011 Global Hunger Index report, The Challenge of Hunger: Taming Price Spikes and Excessive Food Price Volatility, action needs to be taken to address these threats to long-term global food security.

IFPRI said the challenges outlined in its report are exacerbated by historically low levels of grain reserves, though the latest data from the UN Food and Agriculture Organisation (FAO) shows global production has increased this year. It also showed export markets for staple commodities are highly concentrated in a few countries, and a lack of timely, accurate information on food production, stock levels, and price forecasting can lead to overreaction by policymakers resulting in soaring prices.

The Index’s authors recommend a package of measures to tame food price volatility and protect the poor against future shocks. Their principal policy recommendations focus on three levels of action:

-Addressing the drivers of food price volatility;

-Tackling global market characteristics affecting volatility, including building up stocks by coordinating international food reserves and sharing information on food markets; and

-Building resilient systems, farming and aid, for the future.

A short video has been produced by OnBroadcast, which investigates the issue of commodity speculation. The video features interviews with economists, coffee farmers and the director for food and Agrobusiness at Rabobank in Mexico and is available to watch below.