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Globalization

Commodity speculation put to the test

The connection between commodity speculation and higher prices for grains has long seemed clear. But now a new study shows that the opposite could be true and that competition could keep food prices down.

A steep price hike of 40 percent for staple foods, famines, social unrest: these are the results of the food crisis of 2007 and 2008. Shortly before they occurred, speculators had discovered the food market. Many people believe there's a connection there.

"People are taking to the streets, because they know that commodity speculation is an additional factor in destabilizing the price of food," Daniel Hachfeld of the NGO Oxfam said on the way back from a demonstration in the Frankfurt banking quarter protesting against large financial institutes' betting on the price of wheat, corn and rice. Some speculation is even suspected of driving prices. "And that's what citizens don't want," he added.

Numerous studies document this danger. But now some scientists doubt what has long seemed to be an established fact. Thomas Glauben, an agricultural economist at the Martin Luther University in Halle-Wittenberg, and his colleagues even reach the opposite conclusion in a new study: the appearance of certain investors tended to stabilize prices and did not raise them, according to Glauben.

Portrait Thomas Glauben. (Photo: Antje Elsner)

Glauben believes commoditiy speculation can actually be beneficial

An old market with new actors

Grain traders founded an exchange in Chicago back in 1848. Its main purpose was to protect traders and farmers against dangers wheat price too low to make a profit. At the beginning of the year, farmers never know how their crops will turn out. That's why you don't trade actual grain at the so-called commodity futures market, but futures - certificates that pin down the price of grain at a certain point in time in the future.

As of a few years ago, it's not just farmers, grain traders and food companies who trade in this market. Speculators who have nothing to do with agriculture and only have financial interests in mind started betting on the cost of foods. In 2011, the market was $400 billion - eight times what it was in 2004.

Better prices through more competition?

Glauben and his colleagues examined the influence so-called long-only index funds have on the prices of corn, wheat and other grains. They argued that competition on the markets has grown because of such funds, which has allowed farmers to insure themselves for a lower price. "Because of that, there are higher incentives to produce in agriculture, which tend to lead to a higher supply on the global market," Glauben said. "That in turn leads to price-stabilization, which is probably in the interest of consumers."

Portrait Daniel Hachfeld. (Photo: Henning Lüders)

Hachfeld is weary of accepting commodity speculation without limits

Oxfam's Hachfeld said he was skeptical of the report. He said the index funds would only take hold on markets that are already liquid enough. Thus, the advantages for farmers aren't that high, according to Hachfeld. He was especially worried about the large amounts of money that are invested in the index funds.

"If a lot of capital is inserted at once, it opens up the risk of the market being infused with expectations of rising prices," Hachfeld said, adding that such a development could have a negative influence on the actual food prices.

That's not true, Glauben countered, because index funds are constructed in a way that they can't get out of hand.

Better to be safe than sorry

So far there is no scientific consensus on the issue. Additionally, the influence of some forms of agricultural speculation has hardly been researched, such as that of hedge funds. Hachfeld called for a precautionary principle to be applied in food speculation. Such a measure would take a financial product out of the market if it is unclear how much damage it could do.

"There are certain financial products that no one needs, and their potential damage is so big that you simply have to intervene and can't just lean back and do nothing," he said.

Hachfeld added that everyone should still be allowed to trade on the commodity futures market. But those who have purely financial interests at heart should only be allowed to trade up to a certain limit set by regulators: the so-called position limit.

Speculation is only part of the problem

A man filling up his car with bio-fuel at a gas station. (Photo: Joerg Sarbach/dapd)

Fields where grain is grown for bio-fuel cannot be used for food

A final decision on the topic has yet to be taken by the European Union. German finance Minister Wolfgang Schäuble, however, has signaled to the NGO Foodwatch that he plans to argue at the EU-level for a limit on the number of speculative bonds a trading party may hold.

There is one fact that Glauben and Hachfeld agreed on: food speculation alone cannot explain price hikes like the ones during the food price crisis in 2007 and 2008. The production of biogas and bio-fuel in industrial countries, population growth, draughts and a growing demand from countries like China and India also played roles. When it comes to fighting hunger, there are many issues that need to be addressed.

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