activism business food

Some welcome progress on food speculation

When I first started writing about food speculation, I hadn’t really come across many other people or campaigns who were addressing the problem. It seemed to be an overlooked issue, one of the many sub-plots of the financial crisis. That’s changed in the last couple of years. It’s risen up the agenda and in the last week there was something of a breakthrough: Barclays have announced that they will withdraw from speculating on food prices.

But let’s recap for a moment. We’ve had grain exchanges for a long time. They play a vital role in agriculture, allowing farmers to sell their harvests in advance and securing supplies for producers. The absence of markets in developing countries is one of the major obstacles to food security. So what went wrong?

In the past, the commodity exchanges were reserved for people who had real products to buy or sell. It was geared towards farmers and cooperatives and the processors and producers who bought their harvests, as it always had been. In the 80s and 90s the wave of deregulation in the financial markets threw the commodity exchanges open to everyone. Then digitisation made it possible to trade on commodities without being physically present on the trading floor.

It was now possible for anyone to buy and sell futures on vital commodities, including electricity and oil as well as food. Banks and hedge funds began to take an interest, seeking to diversify their portfolios, and there was a boom in commodity trading. When the financial crisis began to hit, the stock market looked like a bad bet and there was a rush into commodities. The oil price went wild, and food prices spiked dramatically.

That didn’t affect us too badly in Britain, but then we spend a fairly small percentage of our incomes of food. In developing countries, people may spend as much as 50 or 60% of their incomes on food. If the price of food doubles, you can simply no longer afford to eat. If those prices shot up because banks and hedge funds were betting they would, then they are essentially gambling on hunger. Nobody should be able to profit from pushing others into starvation. Even among the multiple scandals of the financial sector, it’s hard to think of a more inhuman way of making money.

Speculating on key food crops isn’t the only reason for price spikes of course. Weather is another, rising demand for meat, and crops diverted into biofuels are all far more significant. But food speculation exacerbates and accelerates the problem, and it’s something that can and should be curbed. With a growing population and an increasingly unpredictable climate, there is a squeeze on food supplies that will only get more serious in the coming years. Decades of progress on reducing hunger has been reversed in the last couple of years. Food speculation by banks and hedge funds is a predatory form of investment that we can’t afford.

Barclays have announced their withdrawal from food speculation as part of a drive to clean up their ethics and rebuild public trust in their brand. We’ll see how serious that turns out to be as it rolls out. Others are free to carry on however. Goldman Sachs made an estimated quarter of a billion on the food markets last year.

There is a real possibility of action. The EU parliament has already voted to deal with food speculation, not with a ban, but by putting a cap on the positions that traders can take. This isn’t banker bashing or anti-market rhetoric – it’s the law keeping up with changes in trading. To put things into context, there was around $10 billion invested in the commodity indices in the early years of the last decade. By July 2008 the total had hit $371 billion, before collapsing. Would you really expect the systems that regulated a $10 billion market to still function adequately at 35 times the size?

bankers_anonymous_logoCapitalising on Barclays’ admission that food speculation was incompatible with a new ethical approach, the World Development Movement have upped their campaign to get this proposed legislation moving. They’ve launched Bankers Anonymous, a five-step programme to get the investment banks to kick the habit. It’s a little gimmicky, but it’s headed in the right direction and if you’ve got a minute, head over and sign the petition.


  1. Hi Jeremy — how sure are we that speculation isn’t a red herring? Paul Krugman is well aware of the damage an unregulated banking sector can do, and not afraid of writing about it. But as you’re probably already aware, he’s also been a vocal skeptic when it comes to food speculation. He agrees that in theory, “high futures prices can provide an incentive to accumulate physical stocks.” But he’s suggested that in none of the recent global food price spikes has there been any evidence that such stockpiling is happening — unlike, for example, Enron’s speculation on deregulated California energy markets back in the ’90s, which involved actual withholding of power supply.

    Now, Google informs me that there’s been a lot of back-and-forth between Krugman and his foes about e.g. the reliability of the inventory evidence he’s looking at, and whether the pile-in by banks can cause spikes simply by disrupting the “price discovery” role of futures markets.

    Still, scanning the debate with Krugman lenses on, I’ve yet to see clear evidence tying speculation to the food spikes… while I think the evidence is pretty clear for increased meat consumption, biofuels, and climate shocks. So if food shocks are being driven primarily by us average rich-world citizens (and policymakers working to feed our consumption) rather than by our dysfunctional banking sector, is going after wicked speculators a comforting distraction? Especially for said policymakers, who’d rather not have to tackle e.g. rich-world agricultural and CO2 policies?

  2. Paul Krugman doesn’t seem to agree with you:

    Also a futures market is a zero sum: for any profit made by someone then someone else must have made an equal and opposite loss.

    For everyone going long (betting on a price rise) someone else must have made an equal and opposite bet going short (betting that prices will fall). It really doesn’t matter to spot (current) prices whether three people are betting £50 or 30,000 are betting $50bn: there will be an equal and opposite number of people long as there are short, by definition.

    So unless speculators are buying on the spot market and storing it (which they are not on any large level) then speculation doesn’t raise food prices.

    What it does is reduce volatility by crating a more liquid market. This is a good thing which we would want to maintain. All this campaigning by the WDM and others harms farmers, consumers and investors. The Barclays’ exit is a symptom of that. They are leaving what they call a “reputationally challenged” business so as to limit the PR harm to the rest of their business, rather than because it is actually unethical. So my pension is hurt to salve your conscience. Thanks a bunch.

  3. Paul Krugman is right in terms of textbook theory, not when it comes to what’s actually happening in the markets. The problem is that the rush of money into the commodities markets has created a disconnect between prices and actual supply and demand. We’re talking about trade in commodity-based derivatives, where people are actually betting against the behaviour of other traders, not on the actual data about supply of real goods.

    There’s no doubt that the role of speculators is contentious and hard to prove. It’s fiendishly complex, and much of the key data isn’t collected centrally (including global data on stockpiling, which is key to Krugman’s argument). We haven’t yet caught up to the full effects of financialisation in global food markets.

    You’re right to suggest that food speculation shouldn’t become a distraction Joel. Our changing climate and our appetite for biofuels are much bigger factors in the longer term. What I’m concerned about is price spikes specifically, and economic modelling has shown that only speculation can account for those: “The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying trend is due to increasing demand from ethanol conversion” says the New England Complex Systems Institute.

    Incidentally, that analysis was done after both of Krugman’s posts there.

    The idea that speculation makes markets more liquid and that this is always a good thing is another textbook theory that the real world doesn’t respect. Animal spirits and all that.

    1. Interesting how in 2007-08 when prices spiked for wheat, corn and rice, there was a much bigger spike in the price of rice, which has far less liquid markets with fewer speculators than in the cases of wheat and corn. So the comparison isn’t with a ideal world with perfect prices (doesn’t exist) but against real world alternatives which are worse.

      Quite how you would disentangle ‘good’ speculation’ from ‘bad’ speculation, especially when it is only a minor player in driving prices, shows the foolishness of chasing this point. Which is why the European Parliament is so keen, being full of so many fools.

      1. Not all commodities are equal. As the price of rice began to rise dramatically in 2007/08, several countries put export controls in place to protect their domestic markets – including Vietnam, the world’s second largest producer. That made it worse for everyone else, and different from other commodities.

        How do you disentangle good from bad? The EU suggest that is done by capping positions. But of course you wouldn’t approve of anything that gets in the way of the free market and I wouldn’t expect you to. You’ve got a pension to protect.

        1. Gosh, on rice regulation made things worse. Who would have thought it. Clearly the solution is more regulation.

          You put your faith in EU regulation. What I say you missed in your post on the horse-meat scandal was that the lax regulation was EU regulation. So why you think the Brussels busybodies understand the commodities markets better than the meat one I don’t know.

          Damn straight I don’t want knee jerk reactions guided by your sense of morality to cost me, and millions of others, our future living standards. It is fine for you to be cavalier with your own money, but it is plain wrong to do so with that of others.

          1. So you want to call my understanding naive, and then casually suggest that an export ban is the same thing as the EU putting safeguards on commodity speculation. It’s all just ‘regulation’, obstacles in the way of your beloved markets.

            And funny that you should say my reactions are ‘knee jerk’, and then say that ending food speculation will cost you your living standards, along with millions of others.

            You love to call greens ‘hysterical’, but right back at you.

          2. Nice to see you have dropped your pretence of liking markets. Doesn’t that feel better?

            I never said we shouldn’t end food speculation because it would hurt my pension, I said that the campaigning against ‘food speculation’ is damaging legitimate companies, who along with millions of others my pension in partly invested with. Ending food speculation would hurt farmers, processors and the poor, but hitting Barclays just moves the business to other firms, one who don’t pay tax or employ many people in the UK. Hardly knee-jerk.

            Export bans and EU ‘safeguards’ are all regulation. Some regulation is necessary but the constant idea that the solution to any problem is more regulation is false. Rarely do technocrats know better than the market. Read some Hayek to find out why.

            Finally, I don’t think I’ve called Greens ‘hysterical’. I think in your tizzy you have me confused with some one else.

  4. Sorry, it wasn’t hysterical, it was ‘panic’. Similar enough.

    You remain utterly convinced that I’m anti markets, we seem to go round and round on it on every other post. I have no problem with markets. I have a problem with free market theology, the idea that these omnipotent forces somehow hold the world in balance and that everything will work out if we get out of the way. That’s nonsense that even Alan Greenspan has had to back away from.

    That doesn’t mean central planning or technocratic government. It’s just about policing the boundaries of what is and what isn’t acceptable market behaviour. There’s no such thing as a genuinely free market, otherwise we’d have child labour and open borders. The bounds of the market are constantly being negotiated, and this is part of that.

    It’s not a difficult moral issue. Many banks have already said they’re not going to do it anymore, especially in Germany. So I don’t think I’m being particularly morally sensitive. And nobody’s “hitting” Barclays – they have volunteered to stop doing it. If the rest of the banks follow suit, no regulation will be necessary.

    Anyway, Barclays are hardly going to suffer because of it. They made £278 million on it last year, which is a fraction of this year’s mooted bonus pool of £2 billion .

    1. I have noticed that precision of language isn’t your strong point. Like the fact you have had to write clarifications as to the name of this blog because it doesn’t actually mean what you want it to.

      I dispute your cases for more regulation because you fail to acknowledge that regulation is a cost, a cost we all pay through higher prices. Bad regulation isn’t just costly can make a situation worse and ultimately can be damaging to life (tariffs on food imports for example). So between you seemingly embracing every regulation proposed and me decrying them a middle way can be navigated.

      Go on, prove me wrong. Show me where you want less regulation and a more market orientated solution to something big.

      1. Of course regulation is a cost, but so is the absence of it – except that that cost is externalised and passed on to people in other parts of the world as their food prices rise out of their reach. Everything has a cost.

        I don’t embrace every regulation going. Some areas of our society are underregulated, finance being the main one. Supermarkets is another. The building trade has been crying out for regulation for decades, practically everyone I know has been ripped off by a builder at some point.

        Other areas of life are stifled by regulation. Health and safety culture is a complete headache to any kind of community initiative. Our rules around child care are deeply paranoid. You can buy a house in a day in the US, and here it takes months.

        Regulation is necessary and needs to be kept in balance. Ideally you have as little as possible.

        As for markets, they’re a tool. It makes as much sense to be anti-markets as it does to be against hammers. But equally, it makes no sense to say that hammers are the right tool for everything.

        On your challenge to say where I support market solutions? Climate change. They don’t come much bigger than that and I support cap market based approaches to emissions reduction. But I don’t for a moment think that’ll be enough, on their own, and that’s where you and I appear to disagree.

        1. Do you want additional regulation of supermarkets to that already proposed by the government? If so on what basis given the OFT and Competition Commission have gone over this several times recently?

          1. Not necessarily, we have to wait and see if the latest round of changes works. The ombudsman hasn’t taken office yet, as far as I’m aware.

            Labour never had the balls to stand up to the supermarkets, and ignored the recommendations of the investigations they commissioned. The voluntary codes of conduct have been very loosely applied, and the ombudsman at the OFT is supposed to police them better, so we shall see.

            Right now I’m not in favour of more legislation, just applying the decisions we already made. If the problems persist, we’ll have to revisit the issue. Regulation is an iterative process.

    1. That’s a good summary of the issues, thanks. We can’t say for sure what role financial speculation plays in price spikes, but the benefits of controlling it far outweigh the costs.

      It also answers Devonchap’s question about good speculation and bad speculation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: