By Kim Kido
A recent report published by the Institute for Agriculture and Trade Policy (IATP) describes how and why speculative trading has caused agricultural commodity prices to fluctuate wildly, irrespective of actual supply and demand. The report shows how such price fluctuations negatively impact farmers and consumers, and supports regulations that would stop this from happening.
Food price speculation often give farmers confusing and misleading information that can cause over sowing or under cultivation. (Photo credit: Bernard Pollack)
According to the report, when the price of a commodity crop like wheat is high, for example, a farmer might want to plant wheat on all of his fields. But there are several months between planting and harvesting where the price of wheat may fall. Farmers in such a situation have historically relied on hedging – selling the right to buy the crop in the future for the current price – to minimize the risk of losing everything should the price dive at harvest time. Speculators, on the other hand, aim to profit by betting on which direction an asset will move in the future. Deregulation has led to increasing speculation by institutional investors without a direct interest in the commodities, resulting in volatile prices that do not reflect supply and demand. The report points to this excessive speculation as a major cause of the 2008 food crisis, when food-price riots broke out in 30 countries.
One might expect increasing food prices to benefit farmers, but the report finds this is often not the case. Price changes over a short amount of time “send out confusing, misleading and often completely wrong price signals to farmers that cause over sowing in some phases and under cultivation in others”, writes Jayati Ghosh of the World Development Movement, one of the contributors to the report. When there are benefits, they tend to go to marketing intermediaries instead of farmers.
Volatile food prices also hurt consumers, particularly in developing countries. The report notes the food price crisis of 2008 led to 40 million more hungry people worldwide. National Director of Intelligence Dennis Blair helped to put the problem into perspective when he told the U.S. Senate Select Committee on Intelligence in 2009 that “the global economic crisis, triggered by financial and commodity market deregulation, has replaced Al-Qaeda as the number one U.S. national security threat.”
The report advocates for increased regulation to reign in price volatility due to excessive speculation and ensure a fair market for farmers and consumers.
Kim Kido is a research intern with the Nourishing the Planet project.
To read more about the effects of rising food prices, see: Seminar hopes to encourage long-term pro-poor strategies as the G20 address food price volatility, Global Food Prices Fall Slightly, But Remain Significantly High, Food Riots Return as Global Food Prices Reach Record High, and Beyond the Price of Food: Putting Food Security Into Farmers Hands.