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June 09, 2011

More evidence on speculators and food prices

Chart The G-20 agriculture ministers will meet on June 22–23 in France to discuss how to address the major challenges facing agriculture. A report issued this week by a U.N. agency on the growing influence of financial speculators on commodity markets, including agriculture prices, should be required reading.

"The 'financialization' of commodity markets has changed trading behaviour and significantly affects the prices of such basic goods as staple foods," reported the U.N. Conference on Trade and Development (UNCTAD) on Monday. The UNCTAD report documented the new forces of financialization in commodity markets beginning in 2004—and its role in steadily rising prices, accompanied by increasing volatility.

The study's findings, backed by interviews with physical traders and financial investors, determined that the rise of the commodity derivatives market had encouraged herding behavior to the point where financial investment, rather than market fundaments like supply and demand, increasingly influences prices. The report's findings concluded that acting against the majority of investors, even if justified by market fundamentals, may result in large losses. "It may therefore be rational for market participants to ignore their own information and follow the trend."

UNCTAD recommends greater transparency in commodity trading, internationally coordinated regulation of commodity exchanges, and direct intervention by market authorities to deflate price bubbles.

The UNCTAD report is consistent with a 2008 report by IATP on the damaging role of speculators in commodity markets, as well as a reader we published earlier this year, offering a variety of perspectives on this increasingly urgent problem.

Fortunately, stronger regulation of commodity futures markets is on the G-20 agenda. While agriculture ministers will discuss proposals to improve financial regulations later this month, G-20 finance ministers will make the final decision on those proposals. IATP outlined its concerns about the G-20 approach to commodity market reform in a comment to UNCTAD earlier this week.

As agriculture markets become increasingly volatile, it's becoming harder and harder to deny the deep and destructive influence that financial investors are having on the global agricultural economy. The G-20 agriculture ministers have an opportunity later this month to advocate for new, tough rules for commodity futures markets that will benefit both farmers and consumers.

Ben Lilliston

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