Stop food speculation! Now!

The sharp increase in the prices of food and agricultural
commodities, as well as of oil, in 2007 and 2008, raised
many concerns. The high price of basic food commodities contributed to social unrest and an increase in global hunger, undermining development and people’s right to food as defined in the Universal declaration of Human Rights. The IMF price index of internationally traded food commodities increased 130% from January 2002 to June 2008, and 56% from January 2007 to June 2008. This period of exceptionally steep price increases ended at the time the financial crisis intensified, mid 2008, with food commodity and oil prices showing a sharp decrease. However, late 2009, the Food and Agriculture Organisation (FAO) issued a new warning about rising food prices.

The causes of the sudden price increases and decreases have been described and discussed intensively in the last two years and continue to be the subject of much debate. The role played by speculation in relation to the volatility of commodity prices is receiving wide-ranging attention from academics, international institutions, journalists, market regulators, civil society and many others. Views and analyses vary widely, from firm support of ‘speculation caused price spikes’ and created a commodity bubble, to the standpoint that there is ‘no relation between speculative investment and price increases’. Taking a rather moderate approach in the debate, UNCTAD states that ‘the trend towards greater financialisation of commodity trading is likely to have increased the number and relative size of price changes that are unrelated to market fundamentals.’The two fundamentals that traditionally constituted agricultural commodity prices are roughly described as (1) demand side factors (e.g. more people needing food, income growth, and increased demands for bio-fuel) and (2) supply side factors (e.g. yield growth or bad harvests, the prices of inputs, and availability of food reserves).

Manipulation of these fundamentals, e.g. by keeping commodities away from the market (hoarding), causing
  shortage that results in price increases, is the kind of
 peculation or price management that might still play a role
 n today’s commodity markets. In addition, the value of the
US dollar, in which most commodity trading takes place, can play a role. This paper will focus on the role of financial markets, and especially derivatives markets, in agriculture commodities over the last decade.