Speculation In Food Commodities by CARE Danmark

Financial speculation in food prices harms the world’s poorest people. The U.S. has introduced restrictions – will the EU follow suit?

SPECULATION IN FOOD COMMODITIES

Speculation in food commodities |

| GLOBAL FOOD CRISIS |

Human lives lost in speculation Almost every seventh person in the world is chronically malnourished, and food insecurity is growing concurrently with food prices. In some of the world’s poorest countries people spend up to 80 per cent of their income on food – and when the global food prices fluctuate as violently as they have done over the last few years, people simply cannot afford to buy food.

By Jeppe Toft Hansen Over the recent years the world has witnessed an extreme and historic volatility in global food prices. In only 15 months from the end of 2006 until March 2008 the UN Commodities Index rose by 71 per cent. In 2011, after a dramatic drop prices again reached the all-time record high from 2008. But the world hasn’t seen the last of extreme fluctuations yet. The UN Food and Agriculture Organization, FAO, estimates that the price of basic food stuffs like soybeans and wheat will experience fluctuations by more than 15 per cent in the future, and it is expected that food prices in general will continue to fluctuate. The price fluctuations affect the world’s poorest communities adversely. In Africa and Asia a typical family spends about half of its income on food alone - and in some countries the food budget swallows even more. At the same time people are dependent on being able to buy food from day to day. When the price of a kilo of maize or wheat flour rises to equalling a day’s wage within a few months, food is not affordable, and people are left to starve.

Speculation makes prices soar The soaring food prices have many contributing factors. Climate change reduces crop yields, population numbers grow, diets change, and farm land used for biofuels is on the increase. But these factors cannot entirely explain the extreme price fluctuations. There is a growing recognition of the fact that excessive speculation

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in food products in unregulated financial markets has helped reinforce the strong price fluctuations. ’Almost every seventh person in the world suffers from chronic malnutrition, and food insecurity is a serious global problem, which is increasing, ’says Rolf Hernø, coordinator of CARE Danmark’s climate change programmes. He continues: ’If we want to reverse this trend, a number of measures are needed. A good place to start would be to ban the uncontrolled speculation in basic food stuffs. A prohibition could mitigate the extreme price fluctuations, which are felt all around the world, but which hit the world’s poorest countries the hardest.’

Explosion in speculative trading Even though they are not connected to the physical production and trading in any way, the financial speculators have a lot of opportunities to invest heavily in food commodities. This is done through so-called commodity derivative contracts, which includes for instance futures. At the same time the arrival of big institutional investors has made the extent of speculative trading in food commodities shoot to an all-time high.

ELENE REKHVIASHVILI Georgia ‘Prices on sugar have almost tripled in the recent years and those on oil and wheat increased two-fold. I can only afford to buy meat once a month for my children. One kg of meat used to cost 4-5 USD last year, and it now costs 8 USD. I fear the future, and I am afraid that I will not have enough food for my children.’

ALHOU ABDOU Niger

The global hunger situation

Alarming

Low

Serious

No data

Source: 2011 Global Hunger Index – IFPRI

Today speculators control about 60 per cent of the largest wheat futures market in the U.S. In 1996 they controlled only 12 per cent, and just two per cent of the food contracts result in an actual delivery of physical goods. The original purpose of commodity futures was to shield producers and consumers from price fluctuations, but the enormous increase in the number of speculators in food markets has made steady prices a thing of the past. Instead speculative trading in commodity futures increases price fluctuations and, hereby increases the risk of hunger and of losing human lives in development countries in particular.

Moderate

MISRA AHMED Ethiopia ‘I try to feed my children three times a day, but often I have to feed them less. It is very difficult to get food. I sell onions from my garden, but the quality of food I can afford for my children is close to water. I am not alone, my neighbours are like me and we have to share what we have with each other.’

VANDANA, 14 years old India

Extremely alarming

‘Last year we were in a situation of famine. No words exist to describe the tragedy happening in the houses back then. This year, again, the harvest has failed. We have set some grain stock aside to fill the gap left by the poor yields that we’re seeing this year. But we’re still facing hard times because our brothers had to leave their jobs in Libya and come home.’

‘On a good day I earn 70 rupees a day together with my mother. But the wage is not even enough to buy food for one meal for the family. Earlier we could get some grains as a loan from the village shopkeeper and then pay him later when we got work and wages. But now that is impossible since no one knows what the price will be tomorrow.‘

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| THE EU PROCESS |

The world is waiting for the EU The first step towards limiting speculation in food prices has been taken in the U.S. In the EU, on the other hand, the process is slow, and the proposed legislation from the European Commission is unambitious.

By Kenneth Haar At first it sounded very promising. When the European Parliament in January 2010 cross-questioned the candidate for the post as European Commissioner for Internal Market and Services – the Frenchman Michel Barnier – he was carried away when asked if the EU should do something about speculation in food commodities. Several members of the parliament had with worries followed the fluctuations in food prices in 2007 and 2008. They placed a big part of the responsibility with speculators in the financial markets.

“It is not that complicated. An obvious counter-measure is to limit the sum that an investor is allowed to invest in so-called commodity derivatives.” The response from Barnier was unambiguous. Clearly moved and engaged he talked about hunger around the world and about the necessity for authori-

ties to take action against speculation in food prices. It really sounded like the Commissioner-to-be would do everything in his power to act. This was a very important signal, since the European Commission is the only institution which can introduce new pieces of legislation in the EU. But today – more than two years later – the situation is disappointing.

The EU proceeds at snail’s pace In the U.S. important steps towards stricter control with financial markets have already been taken. But in the EU it will take months for anything to happen. Even though the EU has been discussing and considering reforms of the rules for this part of the financial market since the financial crisis in 2008, the key proposals from the Commission were not tabled until 20 October 2011. Actually it is not that complicated. An obvious counter-measure is to limit the sum that an investor – like a bank, an investment fund or a pension fund – is

American Treasury Secretary, Timothy Geithner, and EU Commissioner, Michel Barnier. The U.S. is worried that the EU will adopt rules on speculation in food prices that are less ambitious than the American regulation. For that reason the U.S. government and the U.S. Financial Services Authority have held several meetings with the European Commission. ©2010 European Union

allowed to invest in so-called commodity derivatives, which are securities that can generate an income if the prices change. If a big amount of money is put on the possibility that prices will rise, the markets where the materials are traded will interpret this as a signal that prices need to be adjusted upwards. If we limit the cash flow on this market, prices will be more stable and transparent. The disturbing trend in the food market has been a hot political issue since 2008. Since 2009 the G20 has discussed what to do about it, and in 2010 the U.S. passed legislation to impose position limits. For a long time the question has been whether the EU would outbid or underbid the U.S. So far the answer is disheartening.

A proposal full of loop holes The Commission’s proposal is primarily made up of a proposed revision of the EU Markets in Financial Instruments Directive, known as the MiFID. The MiFID was adopted back in 2004 and provides guidelines for investors and investment advisers on how to behave.

nies with characteristics that exempt them from the rules and then use them to increase the capital that they put in commodity derivatives. • The position limits to be implemented by the member countries may be replaced by ’alternative arrangements’ – without a specific description of what these arrangements actually are. This can lead to an arrangement that is inefficient, particularly in the countries where it is most needed, like in the UK.

A risky game In comparison with the American law from 2010 (the so-called Dodd-Frank Act) the European Commission’s proposal is very unambitious, and that is unfortunate. In the U.S the big financial institutions have succeeded in convincing politicians and the Financial Services Authority that it is crucial not to go much further than the EU, and their effort to water down US rules is beginning to pay off. Their voice will only grow stronger, if the EU sends out weak signals. It is a political game, and we risk missing the opportunity

“In comparison with the American law from 2010 the European Commission’s proposal is very unambitious, and that is unfortunate.”

The main problems with the proposal are: • With this Directive the Commission admittedly gets power to set position limits, but the Commission is not required to do so. It can choose not to. • There is an exception for several players on the market, such as ’end users’ – it may be food producers and grain companies. This exception can be misused to undermine the position limits if companies like these also act as speculators in the market, or if financial institutions create compa-

of the two most important players in the financial markets to take action this time around. And a new opportunity will hardly arise in the next few years.

Speculation in food commodities | 5

| FINANCIAL MARKETS |

“We have an obligation to regulate the uncontrolled speculation in food markets, since speculation makes food prices soar affecting the world’s poorest people adversely.” Michael Masters

The conscientious

speculator He almost reached the status of a rock star after his testimony to the U.S. Congress on speculation in oil prices back in 2008. He blames speculative traders in the oil market, and he lobbies the government to do something about it. Hedge fund manager Michael Masters founded the organization Better Markets with one single purpose: to stop speculation in food commodities.

By Pernille Slot Hansen Michael Masters is working to minimize unnecessary speculation, and he has a principal message: speculation in food commodities has negative consequences not only for people in the world’s poorest countries, but also for the national markets and the American democracy. He wants to highlight the damaging consequences of the unregulated speculation in raw materials and bring the need of financial reforms into focus. So far his work has produced results, as Michael Masters has been the leading force behind the passing of extensive regulation of speculation in commodities in the U.S.

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Speculation must be brought to light Michael Masters founded the organization Better Markets in 2010. A non-profit, non-governmental organization that aims to give more people and organisations an understanding of the way financial markets work. Unstable markets, rising costs and prices, and lack of prosperity are just some of the consequences of uncontrolled speculation that could affect society. Better Markets seeks to bring these consequences of speculation to light through publishing comprehensive research and analyses of financial markets. The U.S. has already passed restrictive measures that reduce the negative consequences of speculation in food, and now Better Markets – lead by Michael Masters – calls on the EU and other international financial and legislative agencies to pass extensive regulation of food speculation as well.

| FINANCIAL MARKETS |

A step in the right direction As the first bank in Europe, the Nordic bank Nordea has chosen to put a stop to their speculation in food commodities. The Nordic bank Nordea, which is the largest financial group in Northern Europe, has sent a very clear message: It is morally irresponsible to speculate in food. Nordea’s Director for Responsible Investment & Governance, Klaus Fridorf, said: ‘We can no longer refuse the connection between speculation in food and the rising food prices that affect the people in the world’s poorest countries adversely. For that reason we have decided to no longer produce any wrapped investment products where basic food commodities are included in the underlying assets’. For years food prices have been fluctuating widely, and in 2011 they reached a record high level pushing the world’s poorest people into starvation and even deeper poverty. This development has – among other things – been boosted by financial institutions, but now Nordea has declared that it does not wish to contribute to this development anymore: ‘Expert opinion remains divided, but now the arguments for believing that speculation in food results in starvation and poverty are so strong that we don’t want to offer our clients to buy securities which are based on the prices of food,’ said Klaus Fridorf. When the Danish consumer magazine ‘Taenk’ wrote about food speculation in the fall of 2011, the

Danish banks were confronted with the consequences of food speculation, and Nordea’s answer was to scrutinize the facts. That has now led to a redistribution of the group’s investments: ‘In Nordea we have stopped the speculation – and that counts for all of our financial products,’ Klaus Fridorf said. Although Nordea now admits the connection between speculation and rising food prices, the

“The arguments for believing that speculation in food results in starvation and poverty are so strong that we no longer want to offer our clients financial products which are based on the prices of food.” Danish Banker’s Association still refuses that speculation in food prices leads to anything other than liquidity on the market, and so far no other bank has followed Nordea’s example.

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It costs one dollar to prevent malnutrition in a child – it costs 80 dollars to treat a child who is already malnourished. This is why CARE acts before hunger strikes to create long lasting solutions together with poor and vulnerable people. CARE helps people claim their rights and families to produce more food and increase their income to make them more resilient in times of crisis. CARE is one of the world’s largest humanitarian organisations and operates in 84 of the world’s poorest countries benefiting more than 122 million people each year. www.care.dk

Corporate Europe Observatory (CEO) is a research and campaign group working to expose and challenge the privileged access and influence enjoyed by corporations and their lobby groups in EU policy making. This corporate capture of EU decisionmaking leads to policies that exacerbate social injustice and accelerate environmental destruction across the world. Corporate Europe Observatory works in close alliance with public interest groups and social movements in and outside Europe to develop alternatives to the dominance of corporate power. www.corporateeurope.org

Concord Denmark is a network of development NGOs. We are a part of Concord Europe which has national platforms all over Europe. They all work to increase the coherence between the different policy areas of the EU. The objective is to achieve more coherent and fair development policies which at the same time promotes the active involvement of civil society – not just in the EU but also in the developing countries. Concord Europe represents 1800 development and humanitarian organisations across Europe. www.concorddanmark.dk

Published by CARE Danmark, Concord Danmark, Corporate Europe Observatory Editor Line Gamrath Rasmussen, CARE Danmark Editorial team Jannie Fjordside, Pernille Slot Hansen, Jeppe Toft Hansen, Kenneth Haahr, Nanna Apergis Johansen Layout Mette Schou, Gipsy Graphics Front page ©2004 Phil Borges