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Market Speculation

June 09, 2011

More evidence on speculators and food prices

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

May 17, 2011

G-20 struggles to face up to agriculture price volatility

Last week, a background paper for the G-20 Summit of Agricultural Ministers on price volatility from eight international organizations appeared [1]. The paper, dated May 2, was presented last week to the sherpas who are preparing for the summit, to be held in Paris on June 23.  

The analysis treats the failures of international markets seriously. It provides a clear and useful explanation for why price volatility, so useful at low levels in the movement of goods, becomes a serious problem when price swings are too large. Yet the paper is fundamentally dissatisfying.

The start and end points of the recommendations (more so than the analysis) is how to ensure open market liberalization works. And even at that, ends up compromised by the politics of free trade, in which poorer countries can be held to a much higher standard than the richer countries that fund the international agencies providing the advice. So on the one hand, developing countries should further increase their dependence on international markets, while relying on finance (including loans) from the international system—finance that has a poor track record to date, both for timeliness and adequacy. On the other hand, the G-20 countries themselves can continue to disrupt those same international markets, asked only to moderate their public subsidies and mandates for biofuels.

The authors of the report do not question whether the emergence of high levels of volatility in international markets, at a time when international markets are more important to more countries’ food security than ever before, warrants a more fundamental rethink from the governments that are so central to agricultural trade (most of the them G-20 members). Given the mix of agencies involved in drafting the paper, and the critiques some of those organizations have provided of globalization, especially since the food price and financial crises in 2008, this is a pity.

New elements—fundamentally important elements—have been introduced into this final version of the paper, which is the third version to have circulated. For instance, the paper now discusses how to tackle very high levels of food waste, which plagues rich and poor countries alike, though for quite different reasons. Some of the more questionable claims (such as the need to increase food production by 100 percent by 2050) have been toned down, though they remain problematic (the final version suggests a 70-percent increase is needed).

Yet the recommendations are anything but bold. Volatility in international agricultural commodity markets is a problem that is both hurting G-20 interests and that G-20 member states could largely remedy. Instead of promising money to other countries, and thinking of new ways to manage risk, the G-20 need to look to their own policies to consider how to mitigate the causes of uncertainty that are feeding current levels of volatility.

The G-20 includes most of the major exporters of food. Most of the members continue to push for market access for their products—even those, such as China and India, that carefully control their domestic agricultural markets. The G-20 (and the companies they host) have a lot at stake in ensuring international markets function in ways that meet importers’ interests. G-20 members, such as Argentina and India, exacerbated the 2008 food crisis by taxing or banning certain food exports. Others, such as the United States, Canada and European Union persisted in biofuel subsidies that created pressure on demand, and raised prices, at a time when a number of countries were facing food riots. The implications of what the food exporting countries did were not lost on poor net food importing countries (known by the acronym NFIDCs), which are now looking with significantly renewed interest at the possibility of increased food self-sufficiency.

With hindsight, the failure of net food exporters to accept the legitimacy of NFIDC demands for safeguards to protect their access to food, while at the same time insisting on their right to distort international markets with domestic preoccupations was probably the last straw for the Doha negotiations. There is no sign, unfortunately, that the international organizations who authored the report have been given (nor yet taken) the leeway to comment on this crisis in the consensus that has shaped international trade policy since the early 1990s.

Members of the G-20 house the world’s largest agribusinesses, the commodity exchanges that set commodity futures prices, produce most of the grain-fed livestock and provide the subsidies and mandates that prop up the industrial biofuel industry. While the NFIDCs turn to diversifying their food security strategies to encompass more than increasingly unreliable international markets, the G-20 has it within its power to lessen the likelihood and the degree of volatility itself. They have a significant interest in using that power. Unfortunately, there is far too little in the IO contribution to the G-20 Agricultural Ministers’ Summit to help them achieve this realization.

[1] FAO, IFAD, UN HLTF, UNCTAD, and WFP, together with the World Bank, IMF, WTO and the OECD.

—Sophia Murphy

April 29, 2011

New primer on excessive speculation in agricultural commodity markets

IATP has just released a first-of-its-kind collection of writings about excessive speculation in commodity markets and the toll it has taken on agricultural prices. Excessive Speculation in Agricultural Commodity Markets: Selected Writings from 2008–2011 includes a total of 19 different pieces covering everything from the basics of what speculation in commodity markets looks like to why such speculation is responsible for the agricultural price crisis, as well as information on regulating excessive speculation.

In the foreward, IATP's Steve Suppan writes:

As former National Director of Intelligence Dennis Blair told a stunned U.S. Senate Select Committee on Intelligence on February 12, 2009, the global economic crisis, triggered by financial and commodity market deregulation, has replaced Al-Qaeda as the number one U.S. national security threat. Blair’s intelligence agencies forecast widespread regime destabilization if the economic crisis continued to fester without major policy and political reform within two years. His agencies did not specify what reforms were needed nor advocate for their enforcement. That is up to us.

Among others, the extensive list of authors includes Olivier De Schutter, the U.N. Special Rapporteur on the right to food, Michael W. Masters and Adam K. White, Daryll E. Ray, Harwood D. Schaffer, David Frenk and IATP's own Steve Suppan.

Download the full text, or each section individually:

Full Text: Excessive Speculation in Commodity Markets: Selected Writings from 2008–2011

Table of Contents and Foreword

Section I. Overview

Section II. Excessive Speculation and the Agricultural Price Crisis

Section III. Regulating Excessive Speculation 

—Andrew Ranallo

April 22, 2011

Lessons for Africa's carbon exchange

Later this month, carbon market investors will gather in Nairobi at a meeting hosted by the World Bank's International Finance Corporation. The meeting will connect heavy hitters in the carbon market world like Barclays Bank, JP Morgan, and the German bank KfW with African project managers.

Part of the reason for the meeting is the March 24 launch of the Africa Carbon Exchange (ACX). The ACX is positioning itself as the hub of climate change business on the African continent. But as IATP's Shefali Sharma writes in a new commentary, "existing and attempted carbon emissions exchanges in Europe and the United States have suffered one blow after another—fraud, carbon credit theft, poor legislative design, even profits for some major polluters—all at the expense of ordinary citizens and the environment." Due to these failures, Bloomberg recently characterized carbon trading as "a backwater of the global commodities market."

Shefali writes, "There is a real danger that carbon offsets will become a major policy distraction and capital diversion from the real climate change challenges that Africa faces: the urgent task of climate change adaptation and ensuring resilience of communities." You can read the full commentary here.

—Ben Lilliston

February 28, 2011

Commodity market reform: Wall street vs. the regulators

In contrast to the rapidity with which governments moved to use taxpayer funds to rescue the “too big to fail" banks in 2008, the pace of financial and commodity market reform since then has been agonizingly slow. One factor frustrating re-regulation is financial industry resistance to reform, aided in the United States by Republican Party efforts to reimburse the financiers of their November 2010 electoral victory with initiatives to defund the regulatory agencies responsible for implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Before dawn on February 19, the House of Representatives voted to slash the budget of the Commodity Futures Trading Commission (CFTC) by a third. “There would essentially be no cop on the beat,” CFTC Commission Michael Dunn said at a February 23 Senate hearing. CFTC Chairman Gary Gensler had told a House finance committee hearing that such a cut would not only cripple the CFTC’s ability to implement Dodd-Frank reforms, but would prevent his agency from investigating Ponzi schemes and market manipulation. The U.S. Senate is unlikely to support the House Republican assault on regulation, but the Obama administration’s proposal to levy a transaction fee to finance CFTC implementation and enforcement is facing stiff opposition.

However, budgetary sabotage of market regulation is not limited to the United States. IATP, in comments submitted on the revision of the European Commission’s Markets in Financial Instruments Directive (MiFID), noted that the European Securities Markets Authority could not coordinate information among the 27 EU member state market authorities with a staff of just 55, for both financial and commodity markets. The EU’s revised financial and commodity markets legislation cannot meet the Dodd-Frank requirement for a comparably rigorous regulatory system in order for foreign traders to access U.S. markets. On the other hand, if the Republicans and the financial services industry succeed in killing Dodd-Frank, EU traders will be able to access U.S. markets under the self-regulation standards of the Bush administration.

Later on February 19, the Group of 20 financial ministers issued a communiqué, which included calls for several more studies from international agencies, including the International Organization of Securities Commissions, the Organization of Petroleum Exporting States and the International Energy Agency, to determine the causes of “potential excessive price volatility” in commodity markets. The ministers called on their deputies to investigate the “underlying drivers” of that volatility and report to them at their next meeting, April 14–15 in Washington, DC. Noting the effect of “this volatility on food security,” the ministers called for greater investment in agricultural production. President Nicholas Sarkozy had announced that commodity market regulation and food security would be one of three top priorities of the French G-20 presidency in 2011.

Responding to U.S., Canadian and Brazilian opposition to President Sarkozy’s declaration on excessive speculation in agricultural commodities and the need to regulate that speculation, the communiqué delicately stated that its agreement on “indicative guidelines” of trade and financial “imbalances” would take into account the circumstances of “large commodity producers.” On February 14, an international group of nongovernmental organizations, including IATP, wrote to Brazilian Finance Minister Guido Mantega to urge him to discuss with French officials their proposal to the European Commission for an EU commodity regulatory authority. The NGOs argued that it was in the interest of all G-20 members that excessive speculation in commodities be regulated to prevent the speculative bubbles that have been destructive for food and energy security. The French proposal, if implemented, would help prevent such bubbles in EU commodity markets.

On February 16, another group of NGOs wrote to U.S. Treasury Secretary Timothy Geithner to urge U.S. leadership to prevent excessive speculation in agricultural commodity markets. The NGOs supported the G-20 commitment to make the trading of “standardized derivatives” more transparent, but stated that the exemptions sought for “customized derivatives” by the financial services industry would make a mockery of that commitment. Noting the 32-percent increase in the United Nations Food and Agriculture Organization Food Price Index in 2010, the NGO letter stated that the food insecurity and political instability that resulted from food price increases in developing countries was one component of a national security threat to the United States. Commodity market regulation could reduce that threat level. (See previous Triple Crisis posts on speculation and the food crisis.)

The CFTC draft proposed rule on position limits to prevent excessive speculation on commodity markets is open for comment until March 28. The comment deadline on a draft proposed rule on agricultural swaps (currently unregulated, off-exchange trades) is April 4. Both rules, if implemented, would significantly reduce the damage to food security from excessive speculation.

This blog by IATP's Steve Suppan also appeared on the Triple Crisis blog. 

—Ben Lilliston

February 11, 2011

Casino pushes away gamblers: banks warn regulators

After a 154-percent rise in the price of cotton futures contracts during the past year, the Intercontinental Exchange may require financial speculators to show “economic necessity” to buy more than 30,000 bales of contracts. Both hedge funds and index funds have jumped into the cotton market with no plan whatsoever to own the cotton long enough to take delivery on it. They are overwhelmingly betting “long,” i.e., for prices to increase, reports Gregory Meyer at the Financial Times. Nevertheless, according to a February 8 Reuters article, John Baffes of the World Bank said that there is no “conclusive evidence” that anything but supply and demand fundamentals explain the price climb in cotton and many other commodities over the longer term.

The larger backdrop of this extraordinary scene, where a major exchange is pushing away trades and their fees, is regulatory trench warfare in the U.S. Commodity Futures Trading Commission (CFTC) and the European Commission (EC). In both the U.S. and the EC, regulatory agencies are rewriting rules to regulate commodity trading as part of larger financial market reform efforts. Those who contend that there are no data to show that excessive financial speculation has been a major driver of commodity prices claim that  “overregulation” will drive trades to unregulated venues. European banks have warned EC regulators that the banning of any trading practices in the revision of its Markets in Financial Instruments Directive (MiFID) could “exacerbate systemic risks.”

IATP responded to an EC request for comments on 148 questions regulators posed in a consultation paper about MiFiD. The questions covered the regulation of both financial and commodity markets. Europe does not have the equivalent of a U.S. CFTC, although the government of France has proposed that the EC develop legislation to create a European commodity regulatory authority. IATP suggested to the commission that the European Securities Market Authority, designed to coordinate the regulation of stocks and bonds, had neither the expertise nor adequate resources to coordinate the enforcement of market rules in the 27 EC member states.

The CFTC has requested comments on a proposed interim rule to limit the percentage of contracts that any one entity can control during a trading period. If approved by a majority of the CFTC commissioners, CFTC enforcement of the rule will prevent excessive speculation in the commodity contracts to which the rule applies. The initial position limits will be based on the exchange-traded data reported daily to the CFTC. As the huge volume of over-the-counter (OTC, non-exchange) trades are reported to the CFTC, a much larger trade data base will form the basis for setting more precise limits, to be revised annually as the volume and value of all trades in a commodity contract change. The deadline for comment is March 28. Under the authority of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC must approve 30 major rules by July 16, 2011.

CFTC Commissioner Michael Dunn, in Geneva to speak at a January 31–February 1 U.N. Conference on Trade and Development Global Commodities Conference, issued a statement through the U.S. Mission. Commissioner Dunn said that there was “little empirical data to support the commonly-repeated view that speculators caused the oil price spike in 2008.” In 2008, the CFTC exempted OTC energy traders from reporting their trade data to the CFTC, as is required daily of exchange traders, e.g., through the Enron loophole. Opponents of position limits have argued that no major commodity market regulatory reform is necessary, because there is no “empirical data” to show that excessive speculation caused and continues to cause extreme price volatility. IATP has argued since 2008 that there is plenty of very strong circumstantial evidence, including data analyzed in an article in the current Federal Reserve Bank of St. Louis Review, to show that excessive financial speculation has been a major commodity-price driver.

—Steve Suppan

February 10, 2011

A festival for social justice: reporting from the World Social Forum

It is now the fourth day of this great festival of ideas, discussions and debates about the key political issues of our times and the struggles taking place at local, national, regional and international levels to achieve social justice. The focus is inevitably on African issues of struggle and the various forces impacting local communities and national and Pan African trajectories. This World Social Forum (WSF) is timely given that the continent has become the focus of one of the biggest resource grabs since colonial times—be it for agrofuel demand of industrialized countries, land bought by other countries for their own food production needs, or land-based investment deals that take away community control of natural resources right before their eyes and in spite of their resistance. A large number of seminars and discussions here have focused on landgrabs and testimonies offered from across the continent and around the world. Groups and communities are discussing how to force companies and governments to uphold and respect human rights—social, cultural, economic and ecological—of communities and people; and how to stop the pillaging of dwindling natural resources through unregulated investment.

Set on the campus of Cheikh Anta Diop University, 40,000 students are milling amongst stalls, tents and sessions organized by hundreds of organizations; doing street theatre, picking up pamphlets, asking questions. Many of them are volunteers for the WSF and translating during organized events. Their interest and curiosity is inspiring. In fact, just a week before the forum, the new president of the university had decided to suspend the week holiday that was given by the previous president for students to freely attend WSF events. The new president reneged on that commitment and resumed classes, even taking back many classrooms that were assigned to WSF events. The first few days we found ourselves wandering into classrooms where students were patiently trying to sit through classes and shut out the noise and energy emanating throughout the campus due to the social forum. In spite of the logistical hurdles—and not knowing where the next event will be—civil society has rolled right along in making the forum a success.

I have been participating in events and discussions related to climate change, food sovereignty and natural resources. Many of the sessions are trying to make sense of the outcome in Cancún (COP 16) for climate change and what civil society needs to do differently in the run up to Durban, South Africa, who will host the  next major climate meeting at the end of this year. Groups from South Africa are here and already organizing themselves to host civil society organizations in order to create a loud and resounding voice condemning the paltry pledges made by governments in Cancún to reduce greenhouse gas emissions. Many groups feel that trying to convince governments inside negotiating halls at the COPs will not create the urgent shift we need to see in the climate talks towards binding and ambitious targets for drastically reducing greenhouse gases. There is an acute realization that social awareness and mobilization needs to take place locally with specific strategies to shift national positions on climate change. For Africa, anything above a one-degree global temperature rise will mean drastically reduced cropping seasons, much greater incidences of severe and unpredictable weather with dire consequences for food production and hence food sovereignty. The Pan African Climate Justice Alliance is trying to influence national processes around the continent moving towards Durban.

The United States and Europe, however, still determine the fate of the climate treaty and the international targets that will be set. Without a sea-change in U.S. public opinion on climate change as a key responsibility it is hard to see how we can keep the United States government from undermining entirely an international regime that must stop and reverse global warming.  

Roughly six months after Durban will be the 20th anniversary of the Rio Summit—known as Rio+20—where governments will come together with possibly new proposals on dealing with the major environmental problems of our times. It was at Rio, 20 years ago, that the U.N. Climate Treaty was created, in addition to the Convention on Biological Diversity (CBD). Despite these efforts we have drastically worsened our global situation—on both the climate change and biodiversity front.

Several groups have come together at the WSF to begin organizing toward Rio+20. They see the meeting as a major opportunity to reframe the debate moving forward in this decade and want to link awareness building and social mobilizations in the next 16 months that include COP 17 in Durban and onward to Rio in the middle of 2012.

Finally, numerous discussions are also taking place on the linkages between the food, climate and financial crises, their impact on Africa and impacts on small producers. IATP participated in events organized by the Fellowship of Christian Councils and Churches in West Africa (FECCIWA) on climate change, food sovereignty and the food crisis, as well as an event on “Fighting against price volatility and regulating agricultural markets” organized in conjunction with CCFD-Terre Solidaire, a Catholic French NGO, Mooriben (an organization from Niger engaged on creating food security at the local level, including food reserves), Afrique Vert Mali (Green Africa Mali) and GRET, a French development NGO. In addition, we will be involved in the WSF convergence process today and tomorrow where civil society groups who have been meeting throughout the week will come together to see how we can move forward with our plans on both climate and Rio+20. For IATP, we are interested in seeing how the issues of speculation in carbon and commodity markets, agriculture offsets in the climate negotiations, and their impacts on small producers, can be part of the discussions and strategies to build awareness and counter negative proposals and impacts.

Onward to day five. 

IATP's Shefali Sharma is blogging from Dakar, Senagal at the World Social Forum.

—Ben Lilliston

January 21, 2011

New US interagency study on carbon markets

On Tuesday, the U.S. Commodity Futures Trading Commission released an interagency study on carbon emissions markets. The 54-page study for the U.S. Congress was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. While much of the study is taken up with explaining existing oversight tools and how they would apply to trading carbon emissions permit credits and offset credits, the agency authors leave no doubt that the legislative design of carbon markets will greatly affect whether carbon trading results in a reduction of greenhouse gases or an increase. They note, "[F]or the most part, absent specific action by Congress, a secondary market for carbon allowances and offsets may operate outside the routine oversight of any market regulator." Therefore, they recommend that Congress develop legislative authority specifically for trading carbon emissions credits in commodity futures markets.

The CFTC requested comments on 11 questions posed by interagency staff, but, unfortunately, not on the study itself. IATP was one of 23 organizations to submit comments. We informed the interagency group about the regulatory, methodological and scientific challenges in ensuring that carbon offset credits actually represented verifiable GHG reductions. Fraudulent and deceptive activities in carbon trade accounting and marketing, including for trades under the European Union's Emissions Trading Scheme, are reported on a near weekly basis. The interagency report addressed fraud and market manipulation only insofar as carbon would be regulated as if it were a consumable, and not a legislatively created, commodity.

The CFTC and other agencies are struggling to issue rules to implement Dodd-Frank under a torrent of criticism from financial industry service lobbyists and now a Republican majority in the House of Representatives that has called for repeal of parts of Dodd-Frank. Given this huge workload for generally understaffed agencies, it is understandable that the report cannot address all the legislative design challenges for carbon markets that Members of Congress, NGOs, academics and industry lobbyists have outlined. But if there is a single great fault in this relatively short report, it is the lack of any mention of the dearth of environmental integrity in many of the offset credits created in China, Brazil and elsewhere outside the United States (which is not to say that U.S. offsets are all environmentally effective). Under the American Clean Energy and Security Act passed by the House of Representatives in June 2009, more than half of all U.S. industry compliance with GHG caps would be accomplished by purchasing international offset credits, rather than by actually reducing GHGs. To rely to such an extent on the trading of assets of dubious environmental effectiveness to meet GHG caps is to invite disaster. Interagency staff whose agency budgets are on the Congressional chopping block may not be in a position to inform Congress about the very high risks of relying on carbon markets for climate change finance. NGOs and academics should not hesitate to perform this urgently needed due diligence.

—Steve Suppan

November 03, 2010

Don't forget the carbon speculators

This week, the World Bank, the U.N. Food and Agriculture Organization and a number of governments are meeting in the Hague at the Global Conference on Agriculture, Food Security and Climate Change. The original goal was to develop a Roadmap for Agriculture that would feed into the global climate change negotiations at the United Nations.

One of the key obstacles to developing a joint approach on agriculture and climate change is financing: finding money to help farmers and communities adapt to the effects of climate change while reducing agriculture's contribution to climate change. Carbon markets have been one of dominant proposals for financing agriculture-related projects on climate change.

IATP's Shefali Sharma is in the Hague and delivered the below statement to conference participants on the risks carbon markets pose to food security and greenhouse gas reduction goals.

Between 2007 and the spring of 2008, the food price index shot up by 85 percent, then in a few months, agriculture commodity prices fell by 60 percent. The massive price spike and drop was devastating for developing countries, particularly net-food importers. The food price crisis drove another 150 million people into hunger. According to UNCTAD, the extent of price volatility during the food crisis cannot be attributed to supply and demand alone. There is now a wide consensus that speculation on commodity markets by financial traders had a significant role to play in creating the crisis.

In our discussions in the Hague on food security, climate change and “innovative finance," the discussion on speculation in carbon markets and their impact on agriculture commodities is glaringly missing. 

Carbon and commodity markets are tied together through futures markets. And carbon trading is essentially derivatives trading. Unregulated derivatives trading, starting with mortgage-backed securities, was a major source of the current global financial crisis. This crisis is the reason most developed countries claim they have inadequate public funds for climate finance. Yet, carbon trading, to the scale at which it is being proposed, would create a large secondary market of carbon derivatives that has thus far been poorly regulated. When bundled with other commodities, such as maize, wheat  or oil, carbon derivatives have a large potential to destabilize agriculture prices. A second way that carbon derivatives can destabilize markets is through over-the-counter trading: a preferred mechanism of financial speculators who can make unlimited bets in commodity markets through this window. In 2008, 44 percent of carbon traded on the European Emissions Trading Scheme was through over-the-counter trades. As a result the carbon price in the ETS has been highly volatile and low.

Land-based offsets included in carbon markets therefore have significant implications on land tenure, food sovereignty, biodiversity and the right to food. These linkages need to be carefully examined and have thus far been neglected as a topic of discussion in this conference.

Industrialized countries and their industries have a legal and historical responsibility under the UNFCCC to mitigate climate change. They should not pass this responsibility to countries who have had little to do with creating the problem, but who nonetheless will bear the largest impacts. 

Reliable, predictable and public finance needs to fund adaptation needs in developing countries and there are several proposals including carbon, transport and financial transaction taxes that are on the table that should be considered.

—Ben Lilliston

Reporting on the roadmap at the global conference on ag and climate

IATP's Shefali Sharma is reporting from the Global Conference on Agriculture, Food Security and Climate Change at The Hague.

It is the fourth evening of this six-day long conference, which promises to deliver a “roadmap” of concrete actions on agriculture, food security and climate change through a participatory process. This evening, a draft copy of the roadmap is supposed to be made available at the conference center with the announcement that this was “not going to be a negotiated text” and that only a “chairman’s summary” would be produced as the outcome of the meeting.

For three days now, the meetings have continued nonstop from 10 a.m. to 8 p.m. with plenaries morphing into working groups, morphing into numerous side events and an investment fair in the evening.  Participants have complained about not having any breaks or enough time to engage on the numerous topics. The conference has been dominated by panels and confusion has reigned with regards to the objectives of such a “roadmap” that will simply be delivered onto the participants in a top down manner.  Certainly, the chairmen’s summaries of what happened in working groups the day before illustrates that the conference is not meant to necessarily capture the diversity of views (and there are many, with little consensus on anything!), but steadily drive towards a planned outline of a “roadmap.”

Such a shell of an outline was handed to participants today with the headings such as: “Shared Understanding of the Challenges,” “Shared understanding of the Solutions,” “Urgent Need for Action,” and  “A Roadmap for Action.” This latter heading is further divided into “Policies and Strategies” for the catch phrase of the conference: “climate-smart agriculture,” “Tools and Technologies for Climate-Smart Agriculture” and “Financing for Transformational Change.” And yet the working groups have not necessarily been addressing these issues in any meaningful way, nor has there been adequate governmental and civil-society participation in the debates or time to merit a “shared understanding.”

The conference appears to be dominated by agribusiness interests and those promoting opportunities for carbon-related offsets and market-based approaches to solve the climate crisis in agriculture sector in the Global South. The words “mitigation” and “adaptation” have been used interchangeably, particularly by representatives from industrialized countries such as the U.S. and New Zealand, raising concerns that this so-called “roadmap” of the chair of the conference will simply ignore the legal obligations of industrialized countries who are party to the UNFCCC to reduce their own carbon footprint and greenhouse gases domestically and to set the stage for carbon offsets in agriculture.

In response to the proceedings of the conference, Bolivia and Nicaragua on behalf of the ALBA group of countries (Bolivia, Cuba, Ecuador, Nicaragua and Venezuela) made 13 recommendations to the conference organizers regarding the chairman’s summary as the outcome document of the conference. 
They noted that “a process that genuinely seeks to draw together the linkages between agriculture, food security and climate change should involve government delegates from both the agriculture and climate change sectors in order to support fair and effective solutions to the agriculture and climate crises.“ 

They called on the chair to “honor the commitments” under the UNFCCC on mitigation, adaptation and financing. They said, “Developed countries should not shift the burden of reducing their emission to developing countries through the carbon market and offsetting […]” Instead, they called for a “holistic framework” that also includes water management, biodiversity, agricultural prices, commodities markets, livelihoods, employment, salaries, womens’ and indigenous rights and poverty reduction.”

The ALBA group also supported the findings of the International Assessment on Agriculture Science Technology and Development (IAASTD) and referenced the World People's Conference on Climate Change and the Rights of Mother Earth held in Cochabamba on April 2010. They stressed that ecological agriculture “is the route to food security and adaptation to climate change” and as such adaptation should be the main priority of the conference. They noted that a market-based approach will lead to carbon speculation “and inevitably a carbon bubble. On the contrary, we need to get non-sector speculators out of food futures markets. Speculation in food security that leads to mass malnutrition is immoral and should be illegal,“ they said.

They concluded by emphasizing the Adaptation Fund of the Kyoto protocol as the appropriate channel for financing and stressed that further funding could also be obtained through Special Drawing Rights at the International Monetary Fund.

Tomorrow begins the ministerial roundtable to deliberate on the chair’s summary.

—Ben Lilliston

October 20, 2010

Draft AGF report offers clues on climate finance

We've posted an October 4 draft report of the U.N. High-level Advisory Group on Climate Change Financing (AGF). The AGF was set up by the U.N. Secretary General in February, following the global climate talks in Copenhagen, to evaluate and provide options for financing efforts to address climate change, particularly in developing countries. The AGF is expected to release a final draft in November, and present its findings at the COP 16 meeting in Cancún.

Prior to the climate talks earlier this month in Tianjin, China, IATP released a short paper outlining concerns that carbon markets are considered a reliable source for climate finance. While in Tianjin, IATP and other civil society organizations sent a letter to the AGF co-chairs expressing that the amount of climate finance being considered is not enough; public finance should be prioritized over private finance; multilateral banks should not serve as a channel for climate finance; and that carbon markets lack the necessary reliability for climate finance.

—Ben Lilliston

October 15, 2010

Volatile times discussed in Rome

I'm in Rome to talk about volatility (my powerpoint here). More precisely, the volatility in agricultural commodity markets and what can be done to a) mitigate it and b) better cope with its consequences. The topic was part of one of three issues the first meeting of the revamped FAO Committee on World Food Security (CFS) has on its agenda. It will be one of the first topics to be addressed by the High Level Panel of Experts created as part of the revamped CFS structure. It's also an issue close to the French government's heart, as it made clear in the short speech given yesterday by France's Minister for Agriculture. France's President Sarkozy has committed to making agriculture a central part of the agenda for the G20 meeting that France will host next May.  

It's great to see that the topic is preoccupying governments. It should be. Of course agriculture prices fluctuate and of course that fluctuation plays a number of very useful purposes in keeping markets on track. Volatility, however, especially unpredictable and extreme volatility, hurts producers, consumers and ultimately undermines investor confidence, starving the sector of much needed capital.

The problem should be tackled both at the source, by limiting the occasion for extreme volatility to occur, and where it hits home, in poor households especially, by providing safety nets and risk management tools. It has to be tackled comprehensively, too. Volatility has several distinct components that need to be considered jointly. There are the futures markets and speculative investors, a problem much discussed by IATP, on this blog and elsewhere. There is the question of grain reserves, the issue I came to Rome to talk about and also a hot topic for IATP writing. Then there is trade - do we have the right rules? What can governments do better?

Climate change is affecting the heart of any food system: the weather. We don't yet know all that it will mean for the future, but for the millions of people coping today with record-setting disasters, from Central America through South Asia with too many stops in between, it is clear that there is a new and particular urgency to addressing volatility quickly and effectively, with as few ideological fights about governments and markets and their respective roles as possible.

This year should see renewed attention from governments on understanding the causes and taking action to at least mitigate volatility. The background paper for the discussion written for the CFS was disappointing: it gave a useful and concise discussion of how climate change was increasing vulnerability to food insecurity but then turned into a very unpersuasive discussion about responses, mostly highlighting the failures of past reserves policies, and not very convincingly. Here's hoping the next iteration serves governments better. Perhaps by CFS 37 (i.e. in one year's time), we could hope to see some binding government decisions on the issues. Fingers crossed.

—Sophia Murphy

October 05, 2010

Debating climate finance in Tianjin

IATP President Jim Harkness and Senior Program Officer Shefali Sharma are in Tianjin, China this week monitoring the ongoing global climate talks that will serve as the final prelude to COP16 in Cancún later this year.

In a side event held today, entitled “Carbon markets: A reliable and practical source of climate finance?” IATP hosted a panel to discuss public finance mechanisms, market and environmental integrity in carbon trading, and consequences for sustainable agriculture. A press conference will be held on Thursday.

IATP's Senior Policy Analyst Steve Suppan has also written a new paper addressing the U.N. Secretary-General's High-Level  Advisory Group on Climate Finance (AGF), entitled "Trusting in Dark (Carbon) Markets?" Read the press release below:

Climate finance can’t afford carbon markets

Influence of market speculators too risky for the future of the planet

TIANJIN, CHINA – A high-level advisory group to the United Nations will outline its draft proposals this week for financing efforts to combat global climate change. Carbon emissions markets are expected to be central in their recommendations. But carbon market prices would likely be too volatile to provide a reliable source of finance, and other options should be considered, according to a new analysis released today by the U.S.-based Institute for Agriculture and Trade Policy (IATP).

The United Nations Secretary-General’s High-level Advisory Group on Climate Finance (AGF) will present key elements of a draft report on October 7 at the U.N. global climate talks in Tianjin. The AGF will present a final report in Cancun, Mexico at the next Conference of the Parties (COP 16) meeting in early December.

The IATP paper, “Trusting in Dark (Carbon) Markets” by Steve Suppan, warns that carbon markets are vulnerable to excessive speculation by big financial firms. Those same firms wreaked havoc on agriculture markets in 2007-08, contributing to a sharp rise in global food prices and an increase in global hunger.

“The big financial players are lobbying governments to scale up the trading of carbon,” said Suppan. “But there is no independent evidence to show that carbon market price signals spur industry to make long-term investments in greenhouse gas–reducing technology. These big players are also lobbying for regulatory exemptions that would promote the carbon price volatility that delays or even drives away these investments.”

IATP President Jim Harkness and Senior Program Officer Shefali Sharma are in Tianjin to monitor the U.N. climate negotiations. IATP co-hosted an October 5 side event in Tianjin on climate finance proposals.

“Agriculture, particularly in developing countries, is the sector most vulnerable to the effects of climate change and badly needs transparent and predictable climate finance,” said Harkness. “A transition toward more sustainable practices will make agriculture, and livelihoods dependent on it, more resilient to climate change, reduce greenhouse gas emissions and strengthen global food security. We need to consider alternative climate finance proposals to make this happen.”

IATP has authored a series of papers on climate change, including “Speculating on Carbon,” “The New Climate Debt” and “Climate and Agriculture: A Just Response,” among others. For more, go to IATP’s climate and agriculture website.

—Andrew Ranallo

September 27, 2010

Rethinking the fundamentals of food security

After a lull in public attention over the last couple of years, rising food prices are back in the spotlight. A spike in prices triggered in part by the Russian export ban, and a deadly food price riot in Mozambique have rekindled the debate on global food security. The UN Food and Agriculture Organization (FAO) convened a special meeting on global grain prices last Friday, concluding that measures are needed to increase market information and transparency in agricultural trades. Olivier de Schutter, the UN special rapporteur on the right to food, released a new report on the need to address speculation on commodity markets. He called for regulation and the establishment of food reserves, along with a renewed focus on agroecological methods to increase food production in developing countries.

The last food crisis in 2007-08 highlighted some of the underlying problems of the broken global food system: decades of neglect of investment in agriculture; the foolhardiness of relying on trade for food security; and the vulnerability to wild swings in prices caused by deregulated speculation on commodities. World leaders have made some important new commitments to increase spending and attention to agriculture. And there have been some important first steps toward a new approach in the United States.

The recent financial reform legislation increases transparency and puts new limits on commodity speculation. The Obama administration’s Feed the Future initiative and bills under consideration in Congress would increase spending on agricultural development, emphasizing production by small-scale farmers, especially women farmers. The Global Food Security bill sparked a vigorous debate on the kind of research needed to strengthen local food production. Family-farm, faith, environmental and social justice organizations slammed the initial emphasis on GMOs, insisting on agroecological approaches that protect and build upon local knowledge and reduce dependence on imported inputs. Compromise language now broadens the approach to include research on technologies appropriate to local ecological and social conditions, including ecological agriculture, conventional breeding, and genetically modified technology. Of course, how this will all eventually play out on the ground in developing countries is what really matters.

In addition to how food is produced, it is also vital to ensure that people have access to it when and where they need it. Feed the Future and the Global Food Security Act are silent on the question of food reserves. They do provide for some increases in local and regional procurement of food aid. The USAID budget for local food aid expanded to over $280 million last year. This is a breakthrough in U.S. food aid programs, which up to now have overwhelmingly supported in-kind shipments of food purchased in the United States, transported by U.S. shipping companies, and distributed by U.S. agencies and NGOs. Several GAO reports have documented how much more in-kind food aid costs than locally procured food.

These first steps towards increased investment in agriculture and experiments with locally procured food aid matter. They just aren’t nearly enough.

By Karen Hansen-Kuhn

—Ben Lilliston

September 03, 2010

Speculation and the new price commodity crisis: separating the wheat from the chaff

This blog by IATP's Steve Suppan originally appeared on the Triple Crisis blog.

Wheat prices had been climbing prior to the August 5 announcement of a Russian wheat export ban. Kansas Board of Trade wheat futures contracts had gone from $4.92 a bushel on June 10 to spike at $7.95 a bushel on August 5, prompting a reporter to ask, “How could a Russian drought in the age of instant information escape the world’s notice until the country’s wheat crop was devastated?” This excellent question does not yet have a clear answer.

The wheat price crisis has led the press and even policymakers to focus almost exclusively on the traditional supply-demand fundamentals that ostensibly set prices. It’s as if the press were relieved to point to that old standby, weather, as the culprit for a 50 percent increase in wheat futures prices in a few weeks. For a change from the last three years, excessive speculation in commodities by financial institutions would not be accused of driving price volatility. Furthermore, according to the U.S. Department of Agriculture, unlike 2007-2008, global grain stocks were high enough to supply countries that could afford them. Maybe the specter of speculators increasing hunger might be eluded.

But maybe not. The Financial Times reported on August 4 that Glencore, the largest global commodities trader, had requested the Russian export ban, which was granted the following day. The ban enabled Glencore and other traders to break and “re-price” their relatively lower-price forward and futures contracts. Glencore and other major traders stand to make a killing in the new wheat price environment. So market power, usually a subject for political economy rather than orthodox economics, had a role in moving the fundamentals of price discovery and price transmission.

Glencore and other traders operate under the protection of Swiss banking secrecy laws, safe from the European Commission’s proposed revision of its Market Abuse Directive, about which we have commented. Meanwhile the U.S. Commodity Futures Trading Commission (CFTC) is deliberating how to regulate wheat and other commodity contracts. On August 5, the CFTC’s Agricultural Markets Advisory Committee (AMAC) met to discuss the now three-year old market failure when futures and cash prices for wheat failed to converge as futures contracts (generally 90 days for agricultural commodities) expired. Price convergence is what allows futures prices to be interpreted as reliable price benchmarks for forward contracting of commodities, both by commodity sellers and buyers. The pressure on the Chicago Mercantile Exchange (CME) and other U.S. wheat trading exchanges to solve the price convergence problem was made more acute with the release in June 2009 of a U.S. Senate investigation into wheat prices. The investigation concluded that commodity index fund investors had driven prices by exceeding contract position limits unenforced by the Bush administration CFTC.

CME and other exchange officials had told the CFTC at an AMAC meeting in October 2009 they would redesign the wheat contract to eliminate the price convergence problem, which they attributed to changes in transportation and storage costs and in delivery points (e.g. from Chicago to Toledo, Ohio), rather than to excessive financial speculation in commodities. At the August 5 AMAC meeting, the clearly impatient CFTC Chairman Gary Gensler pressed CME as to when the redesigned contract would finally be ready for review. Six-to-eight weeks was the answer.

The CFTC has a lot on its regulatory plate. Just to implement the Over the Counter (off-exchange, unregulated transactions) trade provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, on July 21 the CFTC announced a schedule for 30 new rules. Among the rules will be one on agricultural “swaps” (OTC contracts) that directly affects wheat futures trading.

Because OTC trades are not reported to the CFTC, e.g. by such firms as Goldman Sachs and Morgan Stanley, until well after their market influence has waned, OTC traders do not contribute price information to fulfill the Commodity Exchange Act requirement of price discovery. Regulated exchanges must report their trade data daily to the CFTC for its weekly Commitment of Traders report, a fundamental regulatory tool for estimating trade trends, including market manipulation. Nevertheless, OTC traders take advantage of exchange-traded price information. For this reason and others, former CFTC commissioner Michael Greenberger testified to the CFTC in 2009 that agricultural swaps are per se violations even of the deregulatory Commodity Futures Modernization Act. If OTC wheat trading collapses as the result of a new rule on agricultural swaps, wheat and other agricultural commodity price volatility caused by so-called dark markets will greatly diminish.

But the CFTC faces a tough fight to implement the Dodd Frank legislation, not only because of the massive Wall Street lobby against enforced regulation, but because of continued efforts to deny that financial speculation played a role in price volatility and to argue therefore that Bush administration rules suffice. The latest denialist gambit, by the Organization for Economic Cooperation and Development, to dismiss excessive financial speculation as a major commodity price driver in 2007-2008 has recently been demolished by a Better Markets Inc. study.

However, no amount of prudential regulation, however well-drafted, closely monitored and stringently enforced, will manage the longer term prospect of climate change induced agricultural supply volatility. True, relatively small infrastructure investments could protect the hundreds of thousands of tonnes of wheat that are rotting outside Indian warehouses or the 40 percent of  African agricultural production that rots in the fields for want of basic post-harvest storage facilities and roads for domestic markets.  But the biggest Greenhouse Gas emitting countries, financial institutions and even some NGOs are counting on carbon emissions markets to induce investments in low carbon technology. The International Emissions Trading Organization opposes limits on OTC trading, ostensibly to make the market “efficient” by increasing its liquidity. Of course, IETA members (many of the same firms that have speculated on agricultural commodities) want their chance to make a carbon killing too.

Steve Suppan

—Ben Lilliston

August 12, 2010

Curious critique of Wall Street Reform bill

The New York Times ran an odd commentary yesterday from Minnesota farmer Betsy Jensen concerned about how the new Wall Street financial reform bill could negatively affect farmers and “change the way I do business on the farm.”  She fears that all speculators, even traditional ones, coulld be driven out of the market: “It would be as if I'd lost a third of my customers.”

The commentary's tone was eerily similar to a July 14 Wall Street Journal article that appeared right before final Congressional vote on the Wall Street reform bill, claiming that somehow farmers would lose their ability to use derivatives to hedge risks.

Jensen's take on the Wall Street reform bill is curious for two reasons. One, the bill exempts legitimate end users of commodities like farmers, ranchers and business owners. Its target is Wall Street—not farmers (See IATP's statement on the bill). Second, farmers and agriculture were among the hardest hit by excessive Wall Street speculation in  2007–2008. In other words, farmers needed this bill. This is why House Agriculture Chair Collin Peterson and Senate Agriculture Chair Blanche Lincoln played leading roles in ensuring it was a strong bill. It's why farm groups from the National Farmers Union and National Family Farm Coalition to cotton and peanut growers—and IATP—were part of the diverse Commodity Market Oversight Coalition fighting Wall Street tooth and nail to get meaningful reform.

As a wheat grower, Jensen should have an inkling into the role of Wall Street speculators in wreaking havoc in agriculture markets. Last summer, the Senate Permanent Subcommittee on Investigations issued a report finding that commodity index traders drove wheat prices up and disrupted the market.

Jensen's piece strongly echoed the crowd opposing the Wall Street reform bill, warning that too much reform is a bad thing. Jensen cautioned that “reform must come small steps and not rapid action.” This undoubtedly will become the battle cry of Wall Street lobbyists as they try to slow down efforts by government regulators to implement the new law.

But for agriculture, reform can't come soon enough. It's too bad the Times didn't run a recent commentary from Nebraska Farmers Union President John Hansen instead. Hansen wrote, “This is good news for rural America. Most farmers get the short end of the stick when commodity markets fluctuate wildly, or when everyday commodity values are manipulated by out of control derivative speculation. In the last few years, most farmers were not able to capture the value of higher commodity prices in order to offset the higher costs for inputs like fuel and fertilizer, which forced many of them out of business or eroded their equity. It is clear that farmers and ranchers need stability in commodity markets for the products they buy and sell and the recently passed legislation will help bring order to our economy.”

—Ben Lilliston

August 09, 2010

Financial services industry still in denial: “History, get me a rewrite!”

Even before President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, articles and blogs had forecast the circumvention of the law by legions of clever lobbyists for Wall Street—many of them former regulators—through the federal rule-making process to implement the legislation. In more sophisticated techniques of circumvention than mere lobbying, some firms, such as Goldman Sachs, are reorganizing their trading operations and reapportioning their funds, so as to be able to reclassify their trades and thereby reduce regulatory scrutiny of their trade data reporting. For example, by moving personnel and funds from the proprietary trading division (trading on behalf of the firm itself) to the asset management division (trading on behalf of clients), Goldman hopes to circument the Volcker Rule in the legislation against trading with depositor's money, e.g., Federal Reserve funds almost donated by the government at historically low interest rates. It remains to be seen whether the Security Exchange Commission and Commodity Futures Trading Commission will judge the reorganized trading strategy as complying with the expressed will of Congress and the president.

Pecuniary interests, of course, explain part of the desire to remake the law to serve the perceived self-interest of the financial service industry. But underneath is a profound denial of the damage caused by deregulation and failure to enforce financial market regulation. This denial occurs even as the Bank of International Settlements and U.S. Federal Reserve Bank regulators reported in July that Goldman, Morgan Stanley, American Express and CIT were among the banks that underreported their credit derivative risk exposure (sub req.) by $400 billion in the first quarter of 2009, posing yet another systemic financial risk. Those who decry the new legislation as over-regulation do so not just for pecuniary reasons, but for reasons of self-exculpation. In a nutshell, if we can show there was no excessive speculation that triggered a financial meltdown, then there is no reason to re-regulate the financial services industry.

The strategy for denying the need to regulate financial services was aided by the Organization for Economic Cooperation and Development (OECD) in a “preliminary” study published during the last weeks of U.S. Senate debate on the financial reform bill. The study purported to show that excessive speculation did not occur in agricultural commodity futures markets and did not play a role in inducing extreme commodity price volatility. Indeed, the OECD authors claim that commodity index funds, such as those of Goldman and Morgan Stanley, helped to reduce price volatility by buying and selling more commodity futures contracts. Goldman cited the OECD report as proof in rebutting a July Harpers Magazine article by Frederick Kaufman that accuses the firm of  trading practices that increased food prices and led to widespread hunger in developing countries.

The OECD study has been thoroughly debunked by David Frenk and colleagues at Better Markets, Inc. Frenk et al. show that the OECD authors used a statistical analysis method, Granger causality tests, that is explicitly not designed to analyze “extremely volatile dependent variables,” such as commodity prices circa 2007–2008. Furthermore, the OECD attempts to demonstrate that supply-and-demand factors accounted for extreme price volatility is not coherent, according to actual trade data—especially for energy commodities. Despite the convincing rebuttal of the OECD study, we will not be surprised to see the study cited as authoritative by those who consider the new U.S. legislation to portend over-regulation.

Another tactic to circumvent U.S. legislation will be to fight the European Commission's proposal to expand its Market Abuse Directive to cover over-the-counter (OTC) trades that currently are all but unregulated. The weaker the EC regulation, the easier it will be for U.S. firms to continue business as usual in EU markets. The Wall Street reform legislation severely restricts OTC trades (i.e., firm-to-firm transactions whose price information is not reported in time to contribute to price discovery)—a U.S. legal requirement for commodity exchange operations. In a July 23 submission, IATP supported the commission's proposal to expand its rulemaking to cover OTC trades and responded to other questions that will be discussed at a public hearing on commodity derivatives regulation to be held September 21 in Brussels. If the new U.S. and EU financial and commodity market rules are successfully implemented and enforced, the opportunity for the financial services industry to rewrite the history of a decade of deregulation to justify its opaque and unfair trading practices will be greatly reduced.    

—Steve Suppan

July 21, 2010

Wall Street reform bill a win for farmers and rural communities

It was late 2008 when IATP first sounded the alarm on the role of Wall Street speculators in driving agriculture prices up and down like a yoyo—hurting both farmers and consumers alike—and contributing to growing hunger around the world. A few hours ago, President Obama signed into law a Wall Street reform bill that closes many of the regulatory loopholes that allowed big financial players to wreak havoc on agriculture commodity futures markets. Wall Street lobbyists armed with hundreds of thousands of dollars and a legion of former Congressmen did everything they could to defeat this bill. Amazingly, they didn't. In the press release we issued today (pasted below), we explain why this bill is an important win for farmers, consumers and rural communities.  

Wall Street reform bill signed today will limit excessive speculation in agriculture

New rules to curb Wall Street’s influence over food and farming

Minneapolis – TThe Wall Street reform bill signed today by President Obama will severely restrict excessive speculation on agriculture commodity futures markets that has harmed U.S. farmers and countries battling hunger, according to the Institute

for Agriculture and Trade Policy (IATP).

“This landmark bill is a first step toward preventing the excessive speculation by big Wall Street banks that has created enormous price volatility in agriculture and energy markets,” said IATP commodities expert Steve Suppan. “This is an important win for farmers and rural communities whose economic futures are so tightly linked to agriculture and energy.”

The bill requires the Commodity Futures Trading Commission (CFTC) to set per-commodity limits across all markets on the number of derivatives contracts that can be controlled by any one entity and its affiliates during a trading contract period. Previously, Wall Street firms and others took advantage of the “Enron loophole” and other regulatory exemptions to purchase and then sell off derivative contracts for agriculture and energy without limits, driving prices up and down.

Just as importantly, the bill requires that most derivatives presently traded “over the counter,” i.e., in private deals not subject to CFTC rules and reporting requirements,

be traded on public and regulated exchanges. The legislation also strengthens enforcement standards and prosecutorial resources for initiating fraud and market manipulation investigations.

“This bill will help markets work for agriculture and all Americans, not just for Wall Street and the transnational corporations that hide their deals in private markets,” said Suppan. “With a return to a more transparent price setting process on public and regulated exchanges, farmers and ranchers again will be able to sell their products in advance to generate the cash flows they require for planting, livestock purchases and other farm management expenses.”

Greater transparency and tougher position limits in the U.S. will also benefit many developing countries. Countries dependent on agriculture

imports for food security will be able to forward contract at fairer and more predictable prices. Developing countries that rely on agricultural exports will similarly benefit from greater price predictability and stability as they forward contract sales.

The bill also requires a study of proposed mandatory trading of carbon emissions credits under CFTC authority to induce investments to meet greenhouse gas emission targets. The study will estimate the price volatility and trading volume effects of carbon trading under proposed climate change legislation. Last year, IATP reported on the risks of excessive speculation on proposed carbon markets.

“The next critical phase of Wall Street reform comes in the regulatory implementation of this bill,” said Suppan. “Wall Street lobbyists and industry associations fought hard to maintain their insider privileges. This opposition will be at least as vigorous in the rule-making process.”

IATP will continue to work alongside the Commodity Markets Oversight Coalition, Americans for Financial Reform and other allies to ensure effective implementation and enforcement. The implementation process with regards to agriculture will begin at an Agricultural Markets Advisory Committee meeting at the CFTC on August 5.

In 2008, IATP first reported on the role of big financial firms in contributing to steep food price increases. This dramatic price volatilitynot only affected U.S. agriculture, but ultimately contributed to increased hunger in many of the two-thirds of developing countries that are food-import dependent and that rely on U.S. markets for predictable purchase prices.

—Ben Lilliston

June 30, 2010

Financial reform important for agriculture

With the passing of Senator Robert Byrd, and the retreat of several Senate Republicans, the passage of financial reform now appears to be in doubt. While most of the press coverage has focused on the bill's impact on financial services, including credit cards, mortgages, payday loans and investment bank practices, the effect of the bill on farmers and ranchers has been given less attention.

In a commentary written right before the House-Senate conference committee agreement on financial reform last week, IATP's Steve Suppan outlines how excessive financial speculation from Wall Street banks prevented the commodity futures markets from playing their traditional role in agriculture.

Steve writes, “In 2008, futures prices had become so volatile that rural banks could not assess price risks in order to make loans. Some banks were not loaning to country elevators, and some of those elevators therefore could not pay farmers to forward contract their grain and oilseed production.”

A primary target of the financial reform bill is over-the-counter (OTC) trading: trades that are conducted in private and not over regulated exchanges but that can deeply influence commodity futures markets. OTC trading by big Wall Street led commodity index funds, combined with a regulatory loophole allowing those funds to flood the market and contributing to massive price volatility in agriculture and energy prices in 2007 and 2008. As IATP reported in 2008, this volatility not only affected U.S. farmers but had repercussions—particularly for countries battling hunger.

Reforming our financial system is a work in progress. As Steve writes, we can't afford a watered down approach or to continue “creating unfair markets that damage farmers, ranchers and rural communities.”

—Ben Lilliston

May 21, 2010

Press release: Financial reform bill important for agriculture

Senate vote on historic financial reform critical for agriculture
New rules would help address excessive speculation in agricultural futures contracts

May 21, 2010
Contact: Ben Lilliston, (612) 870-3416, [email protected]

Minneapolis – The Senate’s approval of an historic financial reform bill last night is a first step toward preventing the excessive financial speculation that has wreaked havoc in agricultural commodity futures contracts over the last several years, according to the Institute for Agriculture and Trade Policy (IATP).

Most importantly for agriculture, the Senate bill requires that previously unregulated over-the-counter (OTC) trades be traded on public exchanges. Currently, OTC trades are exempt from regulatory oversight by the Commodity Futures Trading Commission (CFTC). IATP is part of the Commodity Markets Oversight Coalition working to close regulatory loopholes that allow OTC trading and excessive speculation to continue unabated. The Senate bill must now be reconciled with the House of Representatives’ “Wall Street Reform and Consumer Protection Act.” 

“The Senate bill helps make the market function like a market should—in an open and transparent way, instead of like a casino where only five big financial firms know what is going on,” said IATP analyst Steve Suppan. “Excessive speculation has hurt U.S. agriculture by undermining the original purpose of commodity exchanges—to help commodity sellers and buyers manage price risk. We don’t want a repeat of 2008, when prices were so volatile that U.S. grain elevators couldn’t hedge their own risks on commodity exchanges. Some elevators refused to contract to buy farmers’ grain in advance, leading to a cash flow crisis on many farms.”

By requiring that nearly all trades be executed on public and regulated exchanges, the Senate bill enables the CFTC to analyze daily trade data and determine when traders have exceeded the CFTC’s commodity-specific position limits. OTC traders benefit from public exchange price data but hide the price data of their own deals, a huge and unfair trade advantage that has benefitted big financial firms. Position limits refer to the percentage of all commodity contracts open for trade during a specific trading period. Enforcing position limits enables the CFTC to prevent the excessive liquidity that induced price volatility on agriculture commodity markets during 2007–2009.

In 2008, IATP first reported on the role of big financial firms in contributing to steep food price increases in late 2007 to early 2008. Commodity prices later collapsed an aggregate of 60 percent between June and November 2008 as the insolvency of major investors, including commodity index fund dealers, led to U.S. taxpayer bailouts of Wall Street firms.

The extreme price volatility not only affected U.S. agriculture, but ultimately contributed to increased hunger in many of the two-thirds of developing countries that are food-import dependent and that rely on U.S. markets for predictable purchase prices. The Senate Permanent Subcommittee on Investigations and the United Nations Commission on Trade and Development (UNCTAD) have reached similar conclusions on the role of excessive speculation in creating extreme volatility in agricultural and non-agricultural commodity prices.

“If the Senate and House conference committee eliminates the loopholes that enabled the crisis in both financial and commodity markets, President Obama will be able to sign a bill to make markets work for agriculture and all Americans, and not just for Wall Street and the transnational corporations that hide their deals in OTC trades,” said Suppan.

—Andrew Ranallo