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PORTSIDE  September 2011, Week 3

PORTSIDE September 2011, Week 3

Subject:

How Financial Market Regulation Can Help Prevent Another Global Food Crisis

From:

Portside Moderator <[log in to unmask]>

Reply-To:

[log in to unmask]

Date:

Mon, 19 Sep 2011 00:25:03 -0400

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (215 lines)

Broken Markets: How Financial Market Regulation
Can Help Prevent Another Global Food Crisis
By Murray Worthy
Additional research and section 6 by
Amy Horton
World Development Movement
September 2011
http://www.wdm.org.uk/sites/default/files/Broken-markets.pdf

[moderator: the full report may be found at the
above link]

    "Enormous amounts of capital are flooding these
    markets, causing sudden food price spikes that can
    be lethal for low-income families in developing
    countries. Increased volatility caused by the influx
    of `hot money' into and out of commodity markets is
    also causing havoc for farmers, who cannot predict
    what price their crops will command from one month
    to the next"

    [Statement by over 100 civil society organisations,
    including Focus on the Global South, Africa
    Development Interchange Network and Alianza Mexicana
    por la Autodeterminaci√≥n de los Pueblos]

Executive Summary

2008 food prices reached record levels, rising 80 per
cent in 18 months, pushing the total number of people
going hungry to over 1 billion.2 Following this peak
food prices rapidly declined.

However since 2009 the cost of food has been climbing
again on global markets, with food prices reaching
record highs once again in early 2011.3 Many
commentators expect food prices to continue to rise,
threatening the lives and livelihoods of millions of
people.

This huge increase in the cost of food and a sharp
increase in food price volatility over recent years have
triggered a global debate on the causes and solutions to
this crisis. Some factors are widely agreed to have had
an impact on food prices, such as declining crop yields
as a result of climate change, the impact of growing
demand for biofuels and the long term neglect of
investment in agriculture by governments around the
world.

The role of financial speculation in contributing to
this crisis has been much more controversial. Many have
argued that the huge increase in financial participation
in commodity derivative markets has played a central
role, fuelling price inflation and increasing price
volatility. In the UK, the World Development Movement
has played a pioneering role in drawing attention to the
impacts of financial speculation. Our 2010 report The
Great Hunger Lottery introduced the issue to the UK
public, highlighting the role of banks and other
financial speculators in pushing up the price of food
during the last food crisis, prompting significant
debate.

Some commentators have questioned the very premise that
financial speculation can affect the price of food.
Others, proponents of `efficient market theory', have
argued that rather than contributing to food price
rises, financial speculation stabilises food prices.

This debate is not just one of abstract financial market
theory. In the wake of the financial crisis and in the
context of a looming global food crisis we are faced
with a unique political opportunity.

The US, the European Union (EU) and the G20 are all
considering rules to regulate commodity markets, to
ensure their effective functioning and curb excessive
speculation. This report argues that these reforms are
urgently needed to prevent a global food price crisis
driving millions more into hunger and poverty throughout
the global south.

Broken Markets seeks to counter the arguments put
forward by those sceptical of the influence of financial
speculation. It shows how financial speculation has
boomed, turning commodity derivatives into just another
asset class for investors, distorting and undermining
the effective functioning of agricultural markets. It
shows how these changes in the financial markets
translate into changes in the price of food, and the
devastating impact this has had on the world's poorest
people.

It concludes by recommending urgent action to introduce
new rules to limit the influence of financial
speculators and bring transparency and stability to
these out of control markets.

Broken Markets reveals how financial speculation has
overwhelmed commodity markets once designed as a tool to
manage risk. It finds that:

* Financial speculators now dominate the market, holding
over 60 per cent of some markets compared to just 12 per
cent 15 years ago.

* In the last 5 years alone, the total assets of
financial speculators in these markets have nearly
doubled from $65 billion in 2006 to $126 billion in
2011. This money is purely speculative, with none of it
being invested in agriculture, yet it is now 20 times
more than the total amount of aid money given globally
for agriculture.

* The nature of traders in the market has changed with
the introduction of commodity index funds, high
frequency and algorithmic trading and an enormous growth
in opaque, deregulated `over-the- counter' trading.

This financial takeover of commodity markets has
effectively broken them, undermining their ability to
fulfil their basic intended functions. Instead, the huge
growth of financial speculation has:

* Led to prices no longer being driven by supply and
demand for food, but by the sentiments of financial
speculators and the performance of their other
investments.

* Created huge inflationary pressure in the market,
forcing food prices up.

* Increased herding and price volatility.

* Caused the prices of unrelated commodities to move
together.

The consequences have been devastating. In the last six
months of 2010 alone, 44 million people were pushed into
extreme poverty by rising food prices, equivalent to
almost two in every three people in the UK. According to
some estimates, as many as 1.3 billion people currently
go hungry.

Over 16 per cent of people in developing countries and
one third of the population in Sub-Saharan Africa do not
have enough food. The price of food for households in
developing countries is now 55 per cent higher than it
was just four years ago.

Rising food prices have impacts beyond hunger. Increased
food prices also force people to eat less fruit,
vegetables, dairy and meat in order to afford staple
foods; reduce any savings, sell assets or take out
loans; and reduce spending on `luxuries' such as
healthcare, education or family planning. Rising prices
also have a disproportionate impact on women.

Richer countries are also being hit hard by rising food
prices. In the UK, food price inflation in June 2011
reached 6.9 per cent, increasing the average annual
household food bill by £260 and forcing up overall
inflation.

Effective regulation can tackle excessive financial
speculation and prevent it from driving food prices
higher. Broken Markets calls on regulators in the US, at
the G20 and in the EU to introduce:

* Market transparency

- Moving trading of derivatives from deregulated `over-
the-counter' (OTC) markets onto well regulated public
exchanges, similar to the stock market, and introducing
`position reporting' so that regulators and analysts can
properly assess the functioning of the markets.

* Position limits

- Strict limits are needed on the amount of the market
that can be held by individual traders and by financial
speculators as a whole, to prevent them from
overwhelming the markets. Based on analysis of data from
US markets, financial speculation could be limited to as
little as 25 per cent of the market.

Clear, hard rules are required to control financial
speculation and to help prevent another global food
crisis. The policies of the UK government and others who
oppose effective regulation risk condemning millions to
a future of hunger and poverty. Regulators should seize
this unique opportunity to tackle the dominance of
financial speculators and contribute to ensuring fairer
and more stable food prices for consumers throughout the
world.

___________________________________________

Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

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