In her recent column Mary Creagh MP put forward a strong case for Labour supporting a crackdown on speculation on food markets. International cooperation to create regulation and transparency in the trade of food commodities is vital as actions of speculators become increasingly clear.
They are heaping pressure on household budgets here in the UK and pushing up the price of living in developing countries to levels which put lives at risk from hunger. The campaign on food prices is gaining traction as charities such as Oxfam and the World Development Movement mobilise their supporters around what is presented as a primarily humanitarian cause. But there is a wider need for action to tackle the effects of speculation on commodities, not only in the area of food but also on fuel and other goods upon which our living standards depend.
This needs to be seen not just as a humanitarian cause but as a fundamental pillar of modern geopolitics. Access to commodities and resources is and will increasingly be a major driver of international relations. A prime function of government is to secure and maintain access to energy, food and water. In his widely praised Westminster Hall speech President Obama took the issue head on when he observed on the Middle East ‘The West squarely acknowledge that yes we have enduring interests in the region – to fight terror sometimes with partners who may not be perfect to protect against disruptions of the world’s energy supplies.’
It is also important to ensure the staples of life are consistently available at an available price. That is not just a function of diplomacy. Development of domestic sources has long been a major focus of government, and the driver of huge programmes especially in agriculture within the European Union and the United States. However, in an increasingly urbanised and globalised world domestic sourcing is no longer sufficient. Providing equitable access across frontiers is also crucial. The obstacles to this can be protectionism, forcible interception (especially with water) and political unrest. However, many countries and people can also be denied effective access by escalating prices, often heavily influenced by speculation on the commodity markets.
Companies like the Swiss-based Glencore International make vast amounts of money by controlling large percentages of the world’s commodity supplies. They move commodities around the world or speculate on commodity derivatives, which pushes up prices for consumers even though there has been no real increase in demand and there is no shortage of supply. John Maynard Keynes’ view of investing versus speculation was ‘Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market.’
The policy of quantative easing has been a proper response to the global recession but has also probably fuelled speculative investments in commodity markets.
The coalition government have complacently made it clear that it does not see any further need to tackle the effects of speculation. Defra minister Jim Paice answered my parliamentary question on the subject by saying ‘We have seen no conclusive evidence that speculation is leading to increased food price volatility, which is why we do not support calls for further controls on speculation. Furthermore, farmers need liquid markets so they can hedge price risk’. DECC minister Charles Hendry answered my question on the effects of speculation on oil prices by saying ‘It is extremely difficult to distinguish financial players from physical players. Furthermore, not all financial market activity is speculative. For example, through their active participation in the market, hedgers can provide liquidity and reduce price risk. We recognise that non commercial activity in financial oil markets can have a transitory impact on prices. The government have not yet seen clear, robust evidence that this type of activity can have a long term price impact.’
This illustrates their laissez-faire approach to the markets and a natural inclination to over emphasise the short-term interests of some in the City rather than addressing issues of price volatility.
By contrast other governments are looking to take action. At the third meeting of agricultural ministers held in Berlin in January this year, 48 agricultural ministers from around the world agreed that ‘excessive price volatility and speculation on international agricultural markets might constitute a threat to food security’. France as the current head of the G20 is leading the push for tougher regulation of European commodity markets, The new head of the IMF Christine Lagarde while still the French Finance Minister said the EU should draw up proposals on how to supervise derivatives linked to an array of commodities, arguing that the trade was ‘clearly fuelling the volatility of commodities. You have various options . . . whether it is higher premiums, whether it is bigger margin calls, whether it is a cap. It could be a mixture. In any event (we need) proper understanding and clarity.’ The European Commission is planning to bring forward proposals in October which would introduce limits on commodity positions similar to those which exist in the US. The Economic Affairs Committee of the European parliament has already voted in favour of measures to bring greater stability, safety and transparency to the ‘over the counter’ derivatives market with the legislation set to be voted on this month.
The United Nations have also published a report stating that government intervention may be needed to burst the huge bubble that has developed in the price of commodities such as food staples and oil. According to the report prices have rocketed in response to dysfunctional commodities markets, without checks and balances in the system investors create price bubbles that put many basic foodstuffs out of the reach of millions in the developing world. It has been claimed that oil may be as much as 20 per cent overvalued while maize, the staple food of many developing world economies, has been subject to wild swings in price.
According to analysis by the House of Commons Library the statistical evidence from various surveys presents a mixed picture on the links between speculation and price increases, with financial speculation making commodity prices more volatile but not providing an explanation for the specific movement of individual prices in the short term. It is clear that more thorough research needs to be done on the interplay between financial speculation on the markets and actual commodity prices, although as the House of Commons Library analysis observes, ‘It is difficult to think of any market where increased demand does not lead to higher prices in one form or other’. Much market activity is off-exchange and this creates constraints on research into the effects of such speculation. Labour should consider the case for whether future contracts should be cleared through regulated exchanges to improve transparency – and whether this would provide a better evidence base from which to assess the need for regulation to constrain gambling on food and fuel prices, introduce greater stability into the markets, and secure vital resources for citizens of the UK and the rest of the world.
In the first half of the 20th century Keynes recognised that too much speculative activity was economically damaging, saying ‘When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.’ Casino economics has had its chips, it’s time for reform.
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