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If North Africa Starves Next Year, I’ll be Rich!

Inflation is swinging upward in the UK and it will surely cause us some irritation soon in the supermarkets. But most of us do not have difficulty putting enough food on the table for our families, and it’s easy for us to forget that things are different elsewhere. During the past few years sharp rises in food prices have contributed to widespread hunger in the third world and to civic unrest, including the recent toppling of the government in Tunisia,  and riots in countries including all of these: Algeria, Bangladesh, Burkina Faso, Cameroon, the Côte d’Ivoire, Egypt, Ethiopia, Indonsia, Kenya, Mozambique, Senegal, Somalia, Sudan and Yemen.

If you look at a 30 year chart of wheat prices, you can see that the degree of recent price volatitility is exceptional:

Wheat - Monthly Price - Commodity Prices

According to a report by the World Development Movement (WDM), a UK based anti-poverty group, as well as reports in various newspapers, and even some US Senators, the recent volatility in food prices has a lot to do with speculation on commodity futures markets. There are, no doubt, real factors contributing to rising food prices too, such as rising energy prices, the move toward biofuels, and climate change. But almost everyone admits that a recent surge in food commodity speculation by some of the big banks, hedge funds and private investors is playing a significant role. Having left the US property market in tatters, it seems that some savvy investors have been quite literally seeking greener pastures.

The commodity futures markets play a valuable role when they allow farmers to hedge against contingencies in the next season’s weather. But should we allow unbridled speculation in food commodities by those with no connection to the food industry? I think not. We’ve seen many times over the way in which speculative markets create bubbles (in tech stocks and housing debt, for example), and the havoc that is wreaked when the bubbles burst. How much worse it will be when it’s not the prices of stocks and shares in Yahoo! or IBM that are being driven over a period of years to stratospheric highs and spectacular crashes, but the prices of the basic nutrients that people need to survive. The ethics here is rather like a case of my taking out an insurance policy that will pay out if your house burns down. Except that in this case, I’ll be actively contributing to your difficulties: I’m taking out the insurance policy and then buying all the water from the water company so that neither you nor the fire service can afford to access it.

Some will say that the liberty of the speculators to engage in free market transactions is at stake. But why should we let them gamble with the world’s food security?

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5 Comment on this post

  1. The ethical cases that I have heard so far made to allow for continued speculation on food crops are:

    1. It is part of the same market that alloosw for farmers to hedge (ie how do you distinguish right motivation from wrong motivation). I think that is a fairly simple affair to do roughly, but any rough solution may also have people who lose out unfairly and attempts to redress them may become bureaucratic.

    2. That the speculators are the large investors which are pension companies and the like who are trying to ensure we have something to live on when we grow old. I think this is a rather nasty argument as it relies on narrowing our empathy to the extent that millions of others starving is a price worth contemplating for a wealther retirement for oneself.

    3. That free market theories suggest rational speculators would act in ways that reduce price volatility by picking up when prices are too high or too low and make a quick buck on the bet that prices will return to the equilibrium which allows the market to clear. So the argument is that we need more (or more rational?) speculators, not less. As you note, the real world volatility of prices in deregulated markets (and the human capacity for herd mentality) make this seem a rather fanciful argument.

    The liberty argument you raise at the end is related to the arguments above, as I see it. No one argues for the liberty to murder, for example, but may argue for the liberty to defend yourself, ie to protect or provide a good or something which is not in itself constructed as harmful.

    I do recognise, however, that there is a battle of economic ideologies at work, and that some people feel that restricting speculation in order to stabilise prices is the thin end of a wedge that will legitimise ever more restrictions on market activities which are judged to lead to ever more distortions and short-termist subsidies which cannot be maintained and lead to their own crashes, or possibly to some form of totalitarianism to restrict black market activities. This is why the term “liberty” might seem to have real resonance to some people considering these issues.

    I think, though, that if we consider the real life and death consequences of these fluctuations, most of us would be willing to consider a new balance of liberty with safeguards. I thinki that first step (of those who benefit considering the consequences of the system) has not been taken which is why it isn’t a live (party) political issue, and won’t be unless enough sections of the mass media decides to repeatedly draw our attention to the matter in emotive ways.

  2. Perhaps the most intractable problem facing anyone seeking to regulate speculation in vital foodstuffs is the continuum of activity between primary production of food at one end and pure speculation at the other, making it very hard indeed to create a regulatory structure that allows farmers to manage their exposure to market fluctuations but prevents fund managers from treating basic commodities like chips in a casino. I think Asif is right to dismiss efficient market theories as discredited; there is no inherent natural law stating that speculation will deliver a more stable market, but conversely no guarantee that regulation can deliver what it sets out to do.
    As someone who has operated in a fairly closely regulated industry, insurance, I think that commodities markets could learn from our experience. Because there is counterparty risk, we are expected to keep substantial amounts of free capital before being authorised to trade. There is similar counterparty risk for commodities speculators, so they should only be able to trade on recognised exchanges after demonstrating that they have a significant unencumbered capital fund available to meet margin calls. Every bubble that I can think of has been inflated by gearing, people trading with borrowed or non-existent collateral, and while it would not be a perfect solution, a deleveraged commodities market should be less prone to bubble behaviour and therefore deliver some of the benefits to farmers without the catastrophic downside of distorted markets and exploding bubbles.

  3. Thanks for your thoughtful comments Arif and David. Both of you, although generally amenable to the idea of regulation, seem to worry a bit about the difficulty of distinguishing between speculators and those with with industrial interests in taking part in a food commodity market. I’m no expert in this field, and perhaps through ignorance I wonder why it should be so difficult. Couldn’t regulators simply require a license to trade a certain volume on the commodities market based on e.g. the value/amount of real product turnover of your food production/distribution company?

  4. The WDM have a letter up on their website that they want people to send to the European Commission, before the consultation ends on the 2nd February.

    In the letter they give details of how they think it should be regulated. I'm also no economics expert so perhaps someone else can clarify their argument…in the hope that it addresses Arif, David and Simon's queries.

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