If the cause of the global food crisis was a board game, it would be the great detective puzzler Cluedo. Its perpetual victim, Dr Black, would still represent the melancholy – the hungry developing world. Miss Scarlet, Colonel Mustard, Professor Plum et al would be equipped with a whole new set of weaponry; it’s goodbye candlesticks and revolvers, the new inventory is the meat-heavy Westernised diet, climate change, land shortage and the financial markets. And if recent deductions as to who’s responsible for wreaking havoc in the global food market are to be accepted, it was the banker, with the commodity trading, on the stock market.
With such a complex web of cause and effect of world hunger, poverty and rising food prices – from demand for dirty fuel, lack of land supply and unpredictable weather patterns – arriving at a definitive answer is like searching for the proverbial needle in a haystack. There are huge overtones of a classic whodunit at play, and the spotlight is once again on the financial sector. This blame on the banks isn’t new, but has been recently reignited by a World Development Movement (WDM) report, which estimates that in 2010-12, five banks made £2.2 billion from food speculation.
It’s not the first report this year to bring up the case of banks versus bellies. Oxfam France’s report in February, Banks: Profiting from Hunger had a profound influence that resulted in BNP Paribas suspending a $214 million agricultural fund and closing a partially-indexed fund in agricultural commodities; closure of three Crédit Agricole funds that had allowed clients to speculate on agriculture, and an overall withdrawal from the food commodities market by Barclays. The admission through these banks’ withdrawal is a white flag that is being increasingly linked to reconsiderations in corporate social responsibility – and a hands up that they really do have a part to play in fluctuations in food prices.
Food speculation is the act of banks, hedge funds and pension funds ‘betting’ on the prices of staple foodstuffs including wheat, maize and soy, which leads to drastic swings in prices. The suggested effects of this include increased hunger when food becomes unaffordable, and a destabilisation of economy for the true market – the farmers.
Food speculation evolved from a method used by farmers since the 19th Century to ensure a fixed price for their crop when sold in the future, otherwise known as futures contracts. The farmer who hedged his crop in this way meant he was protecting himself from the losses as a result of a bad season, for example. A century later, the practice evolved with modernity and financial speculators began buying and selling futures contracts in agriculture, but only at an intangible level. These contracts then became ‘derivatives’. After the Wall Street Crash in 1929, the US government identified such speculation as a problem, and introduced regulation that prevented excessive speculation. But this lasted for only around 70 years following intense lobbying by the financial sector, which led to deregulation. The mid-1990s saw a rebirth of food speculation and as a result, the WDM reports the share of the markets for basic food staples by those with no direct interest in food markets has increased from 12% to 61% since 1996.
It’s a contentious issue with strong opinions on both sides, ongoing since 2008 when food prices spiked riots ensued. So was it the fault of the influx of commodities traders and their cash?
WDM’s report singled out five banks that were leading food speculation during 2010-2012: Goldman Sachs, Barclays, Deutsche Bank, JP Morgan and Morgan Stanley. Since that period, Deutsche Bank has reflected on its role following “a flood of accusations”. Barclays CEO Antony Jenkins said the practice was “not compatible with our purpose” and agreed to end its speculations. Goldman Sachs is, however, still alleged to be the biggest player in the market – an accusation it vehemently denies.
A Goldman Sachs spokesman told Digest it had repeatedly said it supports effective financial services reform: “Contrary to the unsubstantiated claim that we are speculators, the overwhelming majority of our activities in commodity markets are on behalf of clients. The profit estimates in the [WDM] report are massively overstated.
“Research by respected international bodies like the OECD demonstrates clearly that long-term trends, including increased meat consumption by the growing middle class in the emerging markets and the increased use of biofuels in the developed markets, have created a backdrop for global food shortages. Our own research supports those findings.”
The OECD report in question is a preliminary report prepared by two University of Illinois professors. In its summary it states: “Based on new data and empirical analysis, the study finds that index funds did not cause a bubble in commodity futures prices. There is no statistically significant relationship indicating that changes in index and swap fund positions have increased market volatility.”
It’s a finding shared by AgResource, a US commodity analysis company. By email, President Daniel Basse said: “We can find no indication that banks have had much, if any, impact on world or US food prices. Rather, we do see a correlation that [sic] government biofuel policies and rising food prices. That phase of forced government grain intervention is now ending and world food prices will be relaxing for the foreseeable future.”
Yet even industry insiders beg to differ, as Michael W. Masters, Managing Member/Portfolio Manager of Masters Capital Management, LLC did before the Committee on Homeland Security and Governmental Affairs United States Senate back in 2008. He said: “You have asked the question ‘Are institutional investors contributing to food and energy price inﬂation?’ And my unequivocal answer is ‘YES.’”
US regulation resurrected?
Breakthroughs have been coming out of the US, however, when earlier this month new proposals were put forward by the US Commodity Futures Trading Commission. How easy this will be to implement is yet to be seen – in 2012, Wall Street launched a legal challenge against the right of the regulator to implement such controls.
Miriam Ross for the WDM said: “Now that there are proposals on the table again in the US, it is imperative that the EU reaches a decision to implement a strong regulatory regime, otherwise the EU will become an under-regulated safe haven for food speculation. We are calling on the UK government to stop opposing strong rules on food speculation in the EU negotiations.”
The EU’s proposals, Miriam says, would effectively tackle food speculation. Anti-speculation campaigners have however accused the UK government of blocking proposals. Digest understands that the EU regulators who met earlier this month to decide on restrictions have not yet come to any agreements.
Miriam Ross added: “If the section on food speculation [in the financial market reforms] is left to the very end of the process, it could well be subject to ‘horse-trading’, in which different governments push for what they want and may have to concede ground on things that are lower priority for them. So we are still very concerned that effective measures to tackle food speculation could still be watered down or disregarded due to the UK’s opposition.”
The conflicting evidence in this whodunnit makes calling out the perpetrator too risky to call. The game must continue, the evidence collected, and for a brave trump card to be played by Europe.