Introduction: Food in Crisis

About 10 years ago, there were food price crises, during which there were extreme increases in the price of staple foods, with maize increasing by 180% and wheat by 110% from mid-2006 to 2007 alone. This had many negative effects, especially in the Global South (low and middle income countries), from political instability and riots to negative impacts on food security (the availability of and access to safe, nutritious and sufficient food).

Many causes were identified, from increased demand for biofuels to bad harvests of staple crops and increased consumption of meat. Another suggested cause is financial speculation.

This post will look at the role of financial speculation in food markets, the debate about its relation to food price volatility, the impacts on food security and what can be done to mitigate them.

What is speculation?

Speculation in agriculture is not new. To reduce risk from price changes, producers and buyers hedge, which means they enter into a futures contract, agreeing to a transaction at a set price at a future date. Such contracts are also used for speculation, which is a form of investment where a bet is made on whether the future price will go up or down.

In recent decades, the food system has seen increasing ‘financialisation’ as financial capital gains a growing influence. Deregulation in the USA made it easier for new investors to speculate in agriculture, such as large banks, university endowments, pension and hedge-funds. These investors push the exploitation of price trends and have less knowledge about agriculture markets.

What impact does it have on food prices?

 There is debate about the extent to which speculation causes price swings. Some claimed the evidence is inconclusive, but others critique this view and say it cannot be ruled out. Chowdhury claims there is a general consensus that commodity index trading (a particular type of speculation) has an effect on market volatility. Chadwick suggests speculation contributed to price volubility, leading to the global food crisis, while Emsel links excessive speculation to negative impacts on the right to food.

World Price Indices of Selected Cereals
Source: FAO (2010) http://www.fao.org/docrep/012/al296e/al296e00.pdf

The FAO published a policy brief, which acknowledges that the price hike can’t be fully explained by macroeconomic factors alone. However, they claim that price volatility is increased only in short-term and that in the long-term fundamental supply and demand forces prices. The FAO appear wary of regulation that might “divert speculators from trading and thus lower the liquidity in the market available for hedging purposes”. However, there is an argument that the scale of current trading outstrips the need, so many farmers are unable to hedge due to rising futures prices.

What affect do price increases have on food security?

In contrast to the FAO, NGOs make an explicit causal link between speculation and food insecurity.

Oxfam’s report “Not a Game: Speculation vs Food Security” begins, “Food prices are a matter of life and death to many in the developing world. “ This positions the negative effects of food speculation in the Global South. They highlight that poor households spend about 75% of their income on food, meaning changes in food prices cannot be easily absorbed by household budgets.

In their report, “The Great Hunger Lottery”, Global Justice Now (GJN) attribute the 2007-8 food crisis to speculation. GJN detail the affects of the food crises on people in the Global
South, where 55% of countries are net food importers. The number of chronically malnourished people increased by 115 million across 2007-8, with an estimated 100 – 200million people pushed into poverty.

Price Increases of Selected Commodities
Source: Global Justice Now (2010) https://www.globaljustice.org.uk/resources/great-hunger-lottery-how-banking-speculation-causes-food-crises

Households were forced to take various measures to cope, including cutting out unaffordable foods (with negative implications for health), selling assets or taking out loans (including selling assets key to future income such as land) and reducing spending in other areas such as education and healthcare (with detrimental effects, especially for children). Women were vulnerable to health problems in pregnancy and to taking on risky and insecure employment such as domestic or sex work.

Given food crises have such severe and long-lasting consequences for so many people, it is surely worth taking measures to address every possible cause.

What can be done?

The opaque nature of many transactions mean monitoring, and understanding cause and effect is very difficult. To combat this, Oxfam, GJN and the FAO all call for increased transparency and information.

The NGOs go further than the FAO in their calls for regulation, as they believe more strongly in a clear causal link between speculation and food crises. Oxfam campaign for limits on price movement per day, on how much of the market can be cornered by a single player and on speculation that is divorced from supply and demand, and GJN want the introduction of position limits, which regulates how much financial speculation is possible in a particular market to reduce the chance of financial bubbles (and therefore crashes).

The EU set new regulation for financial markets, including rules to limit speculation on agricultural commodities, which came into effect in January 2018. This was welcomed by Oxfam as “coming none too soon” but they also believe it didn’t go far enough, as it allows limits to be set nationally rather than at EU level.

Oxfam also call for farmers’ resilience to be strengthened “with other risk management strategies including disaster risk reduction, resilient sustainable agriculture practices and measures to empower small producers, especially women.”

Conclusion: Interconnected Problems; Interconnected Solutions

Though the extent of the causal link between speculation and price crises is still debated, the fact is that volatile markets and sudden changes in food prices have had serious and widespread consequences for the food security of millions of people across the world, particularly in the Global South. It is therefore important to take the issue seriously and those with power to regulate (especially the USA, the EU and the G20) should do so. Along with efforts to strengthen resilience of farmers to shocks, this can mitigate negative affects for food producers and consumers worldwide.