A deadly gamble: why food speculation has to be addressed at G20

Thursday, November 3, 2011 - 12:42

One of the issues that we had expected real progress on at this year’s G20 summit was commodity speculation. 

Starting in 2010, French President Sarkozy, the host and chair of the meeting, had focused on the activities of speculators on financial markets who were placing investing much greater amounts in “futures” of food commodities – contracts to buy and sell food in the future.  The speculators have no intention of actually receiving or selling food, but rather trade in the financial instruments before the delivery date. 

There are many reasons that these instruments became much more popular since around 2003, including deregulation of the markets by the US and other countries.

As investors looked for new profit opportunities and to diversify their investments, they turned to this sector, which until then was dominated by grain traders and agribusiness companies. 

Before 2003 the speculators occupied about 20% of the markets; now it’s about 80%.  It’s hard to conclusively prove what impact this investment has had, but it’s also hard to overlook the fact that volatility in food prices skyrocketed as this shift took place. Between 2003 and 2008, investment in commodity index funds by institutional investors (pension funds, etc.) jumped from $13 billion to $317 billion.

The food crisis of 2007-08 was one result of the price volatility that has increased so rapidly. Protests, and sometimes riots, broke out across the developing world as basic food prices increased beyond the reach of poor people. It took nearly a year for prices to come down, and now they’re heading up again, in some cases almost to the levels of 2007.

The remedies for the impact of commodity speculation are simple: limit how much a single investor or fund can buy in any one commodity, and insist on transparency about the transactions. We have just heard that these issues are being actively negotiated in these final hours before the summit concludes, so there is reason to hope that some progress on coordinating regulations is possible.

Another step that could have a major impact on food volatility is support to women farmers, who feed half the world (and more than that in poor countries). If women had the same access to land, technical assistance, and inputs (fertilizer, seeds, etc) as men, they could have a major impact on food supplies and the prices that people pay for locally-produced food.

And finally, the G20 should open its collective mind to greater utilization of food reserves. 

For now they seem ideologically closed to the use of buffer reserves which countries can use to modulate prices – by releasing food when the prices rise too high, and buying up local supplies when the price goes too low to support farmers. Their concern is interference in “free markets,” but ActionAid, as always, insists that the right to food must take precedence.

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