This is the second of two linked posts. The first one is here.
What has been driving food prices up? Left-wing commentators and campaign groups focus on speculation, a stark manifestation of how capital profits from poverty and suffering. I am 100% in favour of exposing the financial monsters, but I think soaring food prices are also driven by underlying changes (fuel prices, competition for land, problems with agricultural productivity). And these may indicate that the corporate industrial agriculture juggernaut is hitting up against natural limits – which is a big deal for the future of the people-nature relationship. That’s the subject of the first of two linked posts, here; this is the second one, and focuses on the connections, and differences, between those underlying issues and financial speculation.
First, some definitions. In international agricultural commodity markets, both prices and price volatility (i.e. the speed at which prices change) have risen in the last five years. Price volatility is at least as damaging as actual price increases to consumers – and especially to poor families for whom food accounts for a big part of their outgoings. Also, international agricultural commodity prices are not the same as domestic food prices, although obviously the two are increasingly closely connected.
I’ll refer to three conclusions from research on the issues, and suggest some conclusions.
First, there is no doubt that a huge surge of money capital went into markets in commodities futures in the run-up to the 2008 financial crisis, as speculative investors lost confidence in other parts of the financial system. (Futures are contracts settled at an agreed price at an agreed future date, that can be used either as a bet on the level of future prices (as they are by speculators), or as a means to hedge the risk of changes in price (as they are by physical traders and producers).) It is estimated that the volume of commodity futures contracts, of which probably a little under one third are for agricultural commodities, doubled in the three years to March 2008, to $400 billion. Of this amount, $260 billion came from index investors, i.e. those who buy shares in funds whose value moves according to an index of commodity prices.
Second, financial speculation played a part in driving up prices at the height of the food price surge. The United Nations Conference on Trade & Development (UNCTAD) report for 2011, whose authors comprehensively surveyed economists’ research on this, was unequivocal: “The strong impact of financial investors on prices, which may be considered ‘the new normal of commodity price determination’, affects the global business cycle in a profound way”, it said. UNCTAD also blamed speculation for hindering economic recovery. So severely has commodity price inflation inhibiting the recovery, the report said, that it “provokes a premature tightening of monetary policy”, i.e. had encouraged central bankers in China, India and Europe to raise interest rates before UNCTAD thought they should have done.
The report offered an arithmetical estimate of how much of the actual price increases were caused by speculators: “for crude oil, index investors accounted for about 3-10% of the price increases in 2006–2007, but […] their impact rose to 20-25% in the first half of 2008. Their impact on grain prices is estimated to have been about half that for oil.” In the first half of 2008, “index-based investment generated a bubble in commodity futures prices”.
Third, the consensus among researchers is that while speculation was largely responsible for price volatility, the long-term trend towards higher prices had long-term causes. Overall, the UNCTAD report argued, it would be “incorrect” to say that index investors caused high prices, but they “do appear to have amplified fundamentally-driven price movements.” A high-level panel of experts reported a similar conclusion to the G-20 – that speculators “acted to amplify short term price swings [my emphasis, GL] and could have contributed to the formation of price bubbles”.
This distinction between the causes of price volatility, of the vulnerability of the poor to its effects, and the causes of long-term price increases, is also made by many left-wing and radical researchers. Jennifer Clapp, in an article underlining the importance of speculation, distinguishes between the speculation, dollar devaluation and trade measures that exacerbated price volatility, and longer-term economic factors (including imbalances in international trade rules, food aid policies and corporate concentration) that help to explain the vulnerability of poor people and nations to this volatility.
What do the financial investors (or speculators, as the rest of us like to call them) think? Analysts at JP Morgan, the gigantic investment bank which trades in commodity derivatives among many other things, recently issued a report that dismissed UNCTAD’s calculations – and in particular, its recommendations for tougher regulation – in scathing terms. The view that speculation was aggravating commodity price increases had not taken full account of the rising production costs of commodities, it argued.
But a survey conducted by UNCTAD of commodity markets participants (both financial investors and physical traders who actually buy and sell shipments of stuff) suggested that JP Morgan’s is a minority view. Most of them believed that during the food price surge of 2007-08, financial investors exacerbated a problem that actually started elsewhere. The consensus among respondents to the survey was that “(i) due to their financial strength, financial investors could move prices in the short term, leading to increased volatility, which may harm markets and drive hedgers with an interest in the physical commodities away from commodity derivatives markets; (ii) in the medium to long term, commodity prices were determined by fundamental supply and demand relationships, even though the type of information used by market participants suggested that financial market information was much more important for trading decisions than was commonly acknowledged.”
Incidentally, the issue of market information is a key to discussions among international institutions and politicians about agricultural prices. It is widely argued by supporters of tougher regulation that – for all the talk of “free” markets bringing prices to levels that accurately reflect supply and demand – the lack of publicly-reported information about stocks and harvests on one hand, and of details about trades in financial instruments such as futures and options (particularly OTC (over-the-counter) transactions that are not registered at financial exchanges), makes a mockery of that claim.
My conclusion from all this is that the best way to understand it is by bearing in mind the difference between price volatility and long-term price trends. In 2007-08 financial speculation exacerbated price volatility and helped to create price bubbles. But all the evidence points to the existence of a long-term trend towards higher food prices – and here larger changes in the international economy are the important causes. I wrote about those in my other post. GL