Food commodity speculation is back in the spotlight as the prospect of another global food price surge looms and banks move to placate regulators.
This week, Austrian bank Volksbank AG became the latest of several European banks to announce it is either ending or scaling back investment funds for food commodities. Others include Deutsche Bank, which said in March it was reviewing the “causes and effects of highly volatile, and above all, rising agricultural commodity prices”.
The Germany-based bank added: “While the working group continues its analysis, the bank will refrain from setting up any new exchange-traded investment products based on basic foodstuffs this year.” This comes as the European Union and US continue to negotiate tighter regulation for food commodity trades.
For campaigners, who have for years lambasted speculative investments for inflating food prices beyond all proportion, these are tentative steps on a long-searched-for victory trail. “This is great news – but not enough,” said the World Development Movement’s Christine Haigh this week. “What we really need is strong legislation to limit all financial sector speculation on the price of food commodities.”
For all parts of the food supply chain, what happens next could impact both profit margins and visibility on stocks.
The extent of this impact is partly dependent, of course, on how much of the recent volatility in food commodity markets one pins to the pin-striped jackets of speculative investors.
Critics would argue that we’re facing a Malthusian-esque supply and demand problem.
Certainly, one cannot attend a talk on food by a UK government minister without hearing, again, that the world needs to produce 70% more food by 2050 from less resources to feed an expected population of 9bn. It’s also worth highlighting that only around 10% of crops are traded across borders.
However, there is growing consensus that speculative trading is part of the equation.
Investments in food commodities have risen from US$65bn to $126bn over the past five years, according to United Nations figures. This might have slipped more easily under the radar had general commodity prices not risen by 147% over the past decade, leading to an era of volatility and pressured profit margins.
“There can be no doubt that speculative activity does indeed have some effect on commodity pricing,” the commissioner of the US Commodity Futures Trading Commission (CFTC), Bart Chilton, said in a speech earlier this year.
The UN’s special rapporteur on the right to food, Olivier de Schutter, said of the 2007-08 price crisis: “While the food price crisis may have been sparked off by the…developments affecting demand and supply, its effects were exacerbated by excessive and insufficiently regulated speculation in commodity derivatives.”
US and EU officials are working on ways to impose tighter regulations on food commodity trades, as part of wider reforms of financial market regulation. The CFTC is already attempting to impose ‘position limits’ on particular commodities.
Meanwhile, a European Commission spokesperson told just-food today (17 August): “The Commission is concerned about speculation around food prices and looks favourably on initiatives restricting such speculation. The Commission is itself putting in place a regulatory framework to this end.”
Moves by those such as Deutsche Bank must be seen in this light. Volksbank board member Martin Fuchsbauer said this week that the bank “understands critics’ arguments”.
How much further the investment banks go is far from clear. International politicking is proving an issue, with China reportedly relunctant to follow the EU-US lead.
Those who would like to see food commodities removed completely from futures markets are likely to be disappointed. There is broad consensus that futures trading can be helpful. In the food industry, for example, hedging is, ironically, a key tool of offsetting volatile commodity market fallout.
What is clear, though, is that anyone with a financial interest in food commodities should be watching developments closely.