The deregulation of financial markets that began in the 80s and 90s has been exacerbated by the massive financialisation of agricultural markets since the early 2000s. The food and economic crises of 2008 and 2010 raised decision makers’ awareness of the dangers linked to such a situation. In its Action Plan1
of 22nd and 23rd June, the G20 agricultural summit presided by France emphasized the need to enhance transparency and improve financial market regulation, particularly agricultural markets. The Agricultural Market Information System (AMIS) was launched in this context. As highlighted in a recent report by Oxfam, which we recommend reading2
, the close link that unites agricultural price volatility and speculation is as real as it is complex. Even if speculation should not be considered the trigger for food crises but rather as a “catalyst for volatility,” one thing is certain: it is essential to reinforce regulation on these markets as a precautionary measure but also because of the risks in terms of food security. However, we should not conclude that speculation be eliminated altogether because it provides a certain liquidity which is central to the functioning of agricultural markets as long as it is controlled and regulated. As such, the recent steps taken by the United States and the European Union make an important advance, but must be pursued in a concerted manner and above all result in concrete proposals3
momagri Editorial Board
Few things seem more remote from the real world of agriculture than financial traders working in the skyscrapers of Chicago, New York, London or Paris. And yet ever more of the financial products they buy and sell are linked to the food we eat. They are derived from underlying agricultural commodities such as wheat, corn, soybean or sugar.
Historically these so-called “derivatives” were designed as an innovative way of dealing with the risky business of growing and selling food. However, the balance has shifted, and transactions on markets in agricultural derivatives are increasingly made without reference to the dynamics of markets in actual food.
Banks have used new types of derivatives to attract players – pension funds, hedge funds, sovereign wealth funds – which invest without any interest in the underlying agricultural commodities. Multinational agricultural commodity traders, which have long controlled the global grain trade, have developed new business lines selling financial services to profit from this new trend. Agricultural derivatives, which used to be closely linked to the realities of buying and selling food, have now become highly “financialized”.
At the same time, agricultural markets have become increasingly unpredictable. High and volatile food prices have caused two global food price crises in three years. Both crises had dramatic consequences in many poor countries: increased hunger, conflict and instability. The 2008 spike in food prices pushed 100 million people into poverty, and by 2009 the number of people hungry passed one billion. The World Bank estimates that 44 million more people fell below the poverty line in the last half of 2010 as prices climbed back to levels close to the 2008 peak.
Financialization of agricultural derivatives means that they are no longer working, as initially intended, to help food producers, processors and end users deal with the vagaries of physical markets.
Even worse, there is an emerging case for the existence of a link between increased speculation and higher volatility and, in some cases, higher prices in physical markets in food. The precise impact of speculation on food prices today remains disputed and cannot currently be proven, not least because of the lack of transparency of financial markets.
However, this should not preclude action on the basis of legitimate and well-founded concerns. […] Because food price volatility can be a matter of life and death, a precautionary approach must be taken to speculating on agricultural commodities. Governments must act, domestically and together through multilateral mechanisms, to prevent harm by curbing excessive speculation through greater transparency and regulation.
3 Please see “momagri’s ten proposals to regulate speculation on agricultural commodity markets” at http://momagri.fr/UK/points-of-view/momagri-s-ten-proposals-to-regulate-speculation-on-agricultural-commodity-markets_948.html