UN debate on excessive food and commodity price volatility; call for regulating price speculation in the futures market
New York, 17 April (Bhumika Muchhala) – The UN General Assembly (UNGA) held a high-level thematic debate on “Addressing Excessive Price Volatility in Food and Related Financial and Commodity Markets,” under the auspices of the President of the General Assembly and the Economic and Social Council.
The event was part of a UNGA resolution on excessive price volatility adopted on 14 February 2012, which called for policies to address long-term structural issues of the commodity economy and integrate commodity policies into wider development and poverty eradication strategies at all levels.
The resolution underscored the financial regulation necessary to tackle excessive price volatility in commodities and agriculture, and represented a step forward for the UN as a forum in which decisions can be made on issues of financial regulation.
Panelists from academic, government and institutional sectors presented varying points of view on the causes, impacts and policy options of excessive price volatility in food and commodity markets. The extent to which excessive price volatility is a function of speculative trading in the futures markets was the key area of contention among the panelists and was rigorously debated.
The thematic debate itself, and the resolution, was an initiative of the President of the Dominican Republic, Leonel Fernandez, who made a concerted call for the establishment of a UN working group on commodities that is open-ended and that makes decisions in the General Assembly.
President Fernandez has been leading an intergovernmental process in the UN on excessive price volatility and the role of financial speculation, and has integrated this issue into various high-level meetings in the UN, including the Financing for Development debates in December 2011.
President Fernandez said that although there are various perspectives on excessive price volatility, and a lack of agreement or consensus on the causes, a new and undeniable element in the world economy has to do with the financialization of basic foodstuffs.
He said the world needs to recognize a new phenomenon, that of a futures market in commodity and agriculture, which has shifted away from traditional criterion of hedging to a non-traditional, non-commercial activity of betting.
The world financial crisis occurred in tandem with a crisis in food and oil prices and other commodities. For example, crude oil plunged from $147 per barrel in June 2008 to $30 per barrel in December of the same year, and it is precisely this “abruptness of the price spike” that should force the international community to think of causal factors other than supply and demand, which don’t explain such price volatility.
“There must be a better explanation for what happened to justify these prices,” he urged.
The facts show that there has been a historical investment in speculative agricultural and commodity futures markets. The volume of these investments skyrocketed from $13 billion just before the crisis in 2005-6 to $500 billion in 2012.
What are the implications of such a surge in price volatility, whose driving forces are disconnected from actual supply and demand rationale?
This question is being discussed in various fora, including the meeting of G20 agriculture ministers in June 2011, who produced a document on price volatility of agricultural products and policy option. This document is a first step in developing a common conceptual basis of the problem.
Policy options must also integrate the challenge of establishing food security. In a world whose population will reach 9 billion people very soon, the structural aspects of agriculture are urgent. This includes the lack of agricultural investment in climate-resilient infrastructure and yield growth, research and development, and access to technology. But for now, “the key problem remains the role of institutional investors in speculative transactions in futures markets,” President Fernandez stressed.
The President asked some pertinent questions, “The Food and Agricultural Organization’s creation of a clearinghouse mechanism for agricultural markets is a key step forward, but does this mechanism have any connection with the futures markets?”
“Will such a mechanism empower an ordinary person to learn what is happening on a daily basis in futures markets, to know who is investing in petroleum futures, for example, in order to see how price volatility is being instigated?”
In conclusion, President Fernandez urged for a scaling of financing and research for the goal of prevent migration of financial resources to unregulated financial transactions.
President Fernandez stressed that “the UN is the only truly multilateral international organization where all countries have a voice and can convene such a debate in a balanced and fair manner. The next step is to set up a commodities working group, and perhaps an international conference in the near future that would conclude with the production of a convention or a treaty on excessive price volatility in food and related commodity markets that would have a binding outcome.”
Jeff Sachs, Director of the Earth Institute and Professor at Columbia University, countered the debate’s focus on financial markets, stating, “I remain to be convinced that commodity and agriculture price volatility is a financial issue. It is a supply side problem in food-deficit and low-income countries.”
Preferring to focus on what he called “the more fundamental issues of supply-and-demand and stagnant productivity in world agricultural markets” Sachs said: “The financialization of these markets certainly widens fluctuations on price trends, but it is not a self-evident proposition that financial markets amplify volatility. Financialization is not a plausible explanation on its own for the persistent and volatile rise of food prices over time. For this price rise, we have to look at climate change issues, droughts, the weather swings caused by El Nino and El Nina and major disruptions to production from precipitation failures and floods in many parts of the world. I do think we’re entering a period of very grave danger in food security.”
“Part of the attention on financial markets is a resort to cheaper ways to fix the problem. People want to point the finger on futures markets, the bankers, or any other target. But the bottom line is that if we don’t produce more food, we are in trouble. And that means an urgent redressal of irrigation systems, water pumps and bore wells,” Sachs argued.
On solutions to price volatility, Sachs said, “I don’t think addressing price volatility through financial markets will be a solution. The solution has to address food availability in food-deficit and low-income countries, in particular sub-Saharan African countries. Yields that African smallholders receive are probably about a third of what is agronomically feasible, a half-ton to 1 ton of output rather than 3 tonnes, and this is due to the lack of financing of basic seasonal production, fertilizer and improved seeds.”
Net food-importing countries in sub-Saharan Africa, have felt the full brunt of this shock. The Sahel and Horn of Africa region has witnessed droughts, hunger, overthrown governments and rebellions for over two years. However, Sachs pointed out that “the international community barely responds to this situation beyond mere food aid. Everybody’s tired and nobody is really paying attention.”
Sachs called for “Helping global smallholders to become more food and climate change resilient, by scaling up inputs, investment and infrastructure.”
Three years ago the G8 promised a major effort for smallholder farmers. However, Sachs argued that they did not deliver. “Make no mistake about it. We are adrift on farm policy because the donor world did not deliver on its promises at all. And pleas from the region are falling on deaf ears,” said Sachs.
“Rich countries are net food-exporters and can absorb high food prices. However, halfway around the world people are dying of hunger, and we need to get serious about agriculture and smallholder farmers, as well as climate change, as the two greatest challenges the world faces.”
Rebutting Jeff Sachs was Michael Greenberger, Professor of Law at the University of Marlyand, who said that he disagrees with the assertion that people are distracting themselves by talking about the financialisation of agriculture and commodity markets.
Greenberger drew attention to how the financial vehicle for commodities and agriculture run by JP Morgan and Morgan Stanley soared from $14 million dollars in 2004 to a half-trillion dollars in 2011.
“This surge of funds comes from hedge funds, pension funds, banks, wealthy investors, and others walking into Morgan Stanley and JP Morgan and betting on food prices going up. These funds are going into a casino, not to farmers or smallholders in Africa, and these casino owners have stealth exemptions that go back to the New Deal by Roosevelt, when investors started buying long contracts on commodity and food futures,” said Greenberger.
The crux of the futures market problem is that as an investor in a futures contract, one is not limited by actual limitations of physical supply. The futures contracts in crude oil bought by Goldman Sachs and Morgan Stanley, for example, are often 13 times the actual size of the physical world crude oil market. This sends a message to the supply-side that simply does not exist.
Greenberger nuanced his argument by saying, “I could not agree more about the urgency of financing farmers, but a half-trillion dollars put into price-better is no small thing. And while some big farmers may be happy about this, a much larger constituency of small farmers are angry as can be about this.”
The futures market is no longer what it started out as in 1933, when President Roosevelt paved the path for farmers to hedge risks on their harvests to ensure profitable returns. Today, the speculators in Chicago are overwhelming the market by creating false signals and distorting markets.
A smooth-functioning financial market is supposed to be 70% commercial and 30% speculative. Today it is 20% commercial and 80% speculative. It is essentially designed for people to bet. “If you want to bet go to Las Vegas, don’t go to commodity exchanges,” Greenberger said.
There are now hundreds of studies demonstrating that futures contracts exceeding the world supply of that commodity are an important premium added to the price that has nothing to with supply and demand. The Dodd-Frank legislation on financial regulation attempted to reinstitute position limits. However, the absence of position limits is clearly a big source of profit for Wall Street, whose lobby weakened the bill.
In this context of Wall Street’s aggressive campaign against regulation, President Obama on April 21 said “this is not a supply-demand problem, this is a speculator problem.” President Obama has convened a task force to go after manipulative speculators in these markets and to provide an answer to the question of where these giant figures are coming from.
“And frankly,” Greenberger said, “it is a US problem. If the US markets were controlled it would have a systemic impact across the world. And there is legislation being drafted in Capitol Hill as we speak.”
The Federal Reserve is beginning to be active in the task of preventing systemic risks by stipulating in the Dodd-Frank legislation that banks can only receive rescue packages if they get their funds out of commodity markets.
Greenberger argued that investment firms like Morgan Stanley should not be the biggest owner of heating oil in New England. “The market should be returned to the commercial users who have been scared away by price volatility.”
On 13 March 2009, exactly 190 world hunger relief groups wrote to President Obama urging him to control speculation in the futures market because it is causing mass hunger in developing countries. The development community clearly believes that policymakers need to pay attention to the gambling and financialization of commodities and agricultural products in the world market.
In conclusion, Greenberger suggested that some of the liquidity currently funneled into the futures market could instead be allocated to agricultural financing for global smallholders that Professor Sachs is advocating for. He pointed out that activism needs to impact the regulatory process as well.
Jose Antonio Ocampo, Professor at Columbia University, followed up on Sachs saying that a third dimension should be added, that of research in tropical agriculture. “Most of the research has been in temperate zone agriculture,” Ocampo said, “and more needs to be done on tropical agriculture.
Ocampo also asked a series of questions to frame the panel debate. “What is the relationship between financial market volatility and commodity price volatility? Should agents of financial markets intervene in commodity markets? What are the channels of regulation? To what extent can financial instruments be used to protect commodity users?”
An idea promoted by international agencies is applying coverage from international institutions to protect consumers from price volatility. Is this a feasible idea, asked Ocampo. “To what extent should markets be more long-term in their time horizon to protect consumers from the short-term volatility?”
Currently for coffee farmers, the cost of protection is larger the benefits from protection offered by markets. Can instruments be used that can yield benefits that outweigh the transaction cost of the trading instrument?
This raises attention to two sets of issues, that of market regulation and the size of it, and using markets to protect consumers, and especially the poor, from price volatility.
Given the fact that food products constitute the vast majority of household expenses for the poorest, is the financial market the only instrument or are there other instruments that authorities can channel to protect the poor from price volatility?
David Hallam, Director of Trade and Markets Division at the UN Food and Agricultural Organization (FAO), stated that one of the key initiatives of the FAO in the international debate on price volatility is the New Agricultural Market Information System that aims to provide transparent information on price movements in key agricultural items crucial to farmers globally.
The FAO acknowledges that there is no one single causal factor in price volatility. A wide range of factors, from biofuel feed stocks, a global slowdown in yield growth, a slowdown in agricultural investment, the growing interest of financial actors in agricultural markets, increasing world demand for food and infrastructure and supply chain problems all play a part in the saga of price volatility.
However, one area that hasn’t been paid enough attention to in the debate on food insecurity is food stock levels. In recent years, stocks of major grains have plummeted to dangerously low levels.
“Bad policy choices in the crop-to-market process have impacted world markets, as has speculation. The evidence of how exactly financialization has impacted markets is still nebulous, and this makes it difficult to address policies. The many grey areas of over-the-counter derivatives and algorithmic trading makes it very difficult to demonstrate causal evidence,” said Hallam.
Another aspect that hasn’t been paid any attention to is the muted supply response from countries, excluding the OECD countries and Brazil. The impact on producers has not yet been examined, and this is an area that has important policy implications.
The message from developing countries that agricultural resiliency needs to be strengthened, and the question is how an enabling environment can be created to make this happen.
The findings of FAO reviews show that policy measures that have been introduced have had little impact or were counterproductive, particularly trade policies, which many countries ran to on impulse because they are relatively cheap and easy to implement.
The policy choices required to meaningfully address food insecurity and price volatility are controversial. They include policies to regulate and control biofuel production and the regulation of financial markets. One area to start with is deepening transparency and providing better market price information.
According to Hallam, the role of the international community was strengthened by the G20 agricultural ministers meeting in 2011. “But price volatility is a global problem that requires global solutions, so the G20 forum is not entirely sufficient. The UN needs to play its requisite role, and in that regard the FAO welcomes the efforts of President Fernandez in raising these issues in a large-scale debate in the UN such as we are currently having.”
“There was some discussion about formulating an international working group,” Hallam mentioned “and I think that would be a very good idea and I’m sure that the FAO would very much support that.”
Algeria made an intervention on behalf of the G77 and China, and stated that the “G77 and China holds the view that the increasing involvement of non-commercial actors in the market of food and food-related commodities has played a major role in the emergence of the problem of the excessive food price volatility.”
The G77 and China’s statement connected the trend of commodity derivative trading, and the scaling up of its frequency and size to a level that outstrips the physical growth in commodity production, to the overall financialization of the real economy in the context of what the Secretary-General of UNCTAD has qualified as “finance-driven globalization.”
The G77 and China identified the large inflows of speculative capital to commodities to global food insecurity, which “constitutes a major challenge to developing countries, most of which rely on the production and export of commodities.”
The G77 and China also alerted to the several other causal factors of global food insecurity. Among these are the unsustainable patterns of production and consumption in the developed world, rich country agricultural subsidies in developed countries, the wastage of food in developed countries and post-harvest losses in the developing world due to the lack of agricultural infrastructure.
In particular, emerging trend of “massive acquisition by large investors from developed countries of farm land in developing countries” was highlighted. The farm land is being bought not for food security, but for the speculative purpose of future agricultural production, which thus creates a significant added burden to food insecurity globally.
The G77 and China urged for regulation and transparency in the financial and commodity market in order to meaningfully address the financial dynamics of excessive commodity price volatility.
“As a matter of urgency and priority, member states should entrust the United Nations with the task of exploring appropriate measures and policies that need to be in pace in this regard especially with relation to the future exchanges and markets of food commodities.”
The G77 and China asserted the conviction that the international community should consider these developments as issues of common concern that are the direct product of the systemic problems facing the global economy that have to be resolved, including through the full accomplishment of the reform of the global financial system and architecture.
China aligned itself with the G77 and China’s statement, while affirming the convening of this debate. China proposed three key proposals.
First, developing countries should root themselves in domestic production and self-sufficiency, and attach importance to agriculture. In coordination with the international community, developing countries should carry out policies designed to increase food production and crop yield.
Second, financial market regulation should be strengthened with the goal of prohibiting the use of food as a tool for profiteering by curbing speculation on food prices. Stabilizing food prices needs effective international cooperation.
Third, both developed and developing countries should work together against trade protectionism in all its forms. Policymakers need to pay greater attention to the impacts of climate change and agriculture and work on the basis of the principle of common but differentiated responsibilities to achieve results.
China stated that it is “determined to cooperate internationally in order to maintain food security and the realization of the Millennium Development Goals. The Chinese people have found their own path toward food security and agriculture that aligns by the following points. First, domestic supply of food production is critical. China has always put agriculture at the top of national economic development and has placed farmers income as a priority.”
Second, China has always increased agricultural productivity relying on science and innovation, including the scaling up of agriculture infrastructure.
Third, China has deepened agricultural reform and implemented a basic management system for agriculture that addresses contracted land.
The Community of Latin American and Caribbean States (CELAC), represented by Chile, called for the UN to “exercise its governance leverage to properly address this phenomenon of excessive price volatility from an inclusive perspective, embracing economic, social and sustainable development standpoints.”
CELAC stated that their member countries are deeply concerned by the impacts of excessive price volatility on food security and sustainable development in developing countries.
A more comprehensive and coordinated response to address the multiple and complex causes of excessive price volatility of food and commodities is still needed.
Commodity-dependent developing countries and economies in transition are higly vulnerable to excessive price fluctuations, and to address this speculative financial transactions in food and related commodities must be controlled.
CELAC concluded by reinforcing the central role of the UN in providing political guidance in global issues and to define policy guidance for the work of its agencies on this particular issue.
Argentina asserted that “it is clear that excessive volatility is a threat to food security, given the high correlation between price volatility and price speculation. Thus, the need to regulate price speculation is of great interest to us. In addition, triangular cooperation between developing countries and technology transfer are also crucial.”
For several years Argentina has been struggling to eliminate protectionism, and this has been stressed in bilateral and multilateral negotiations, in the Doha round framework and in groups such as the Cairns groups on agricultural subsidies.
Agricultural subsidy distortions in markets since the 1950s has deep negative effects on food production in developing countries. Any work on agricultural and commodity prices has to reflect the way subsidies skew prices as well.
The current President of the General Assembly, Ambassador Nassir Abdulaziz Al-Nasser from Qatar, reiterated the fact that 40% of inflationary pressures in the African region come from food price increases, and these pressures consume increasingly large shares of national budgets.
In Africa, food price increases have made it impossible to realize the first MDG of reducing the level of hunger by half. Rising food prices and food insecurity have led to political upheaval in more than 60 countries globally since the onset of the food crisis in 2008.
“On these facts there is little disagreements. The focus now must be on the need to address the causes and consequences of food price volatility through a comprehensive approach that strengthens investment in agricultural production in developing countries and curbs speculation in food and commodity financial markets,” said Ambassador Nasser.
“This debate has reinforced that the international community clearly needs to do much more work to develop an understanding of the role that financial markets have played in increasing food prices. Each of us will have our own views, but I hope the evidence presented today has furthered our understanding of what we do know and what we don’t know.”
A few issues have stood out. The world’s poor need fair commodity prices, and alternative approaches need to be taken to address the various problems.
In conclusion, Ambassador Nasser assured the General Assembly that he will be integrating the outcome summary of this debate into the May 17-18 high-level thematic debate on the world financial crisis.