Speculation a Major Contributor to Global Food Crisis, New Report Finds

Press Release

November 13, 2008

Contact: Ben Lilliston, 612-870-3416, ben@iatp.org

Speculation a Major Contributor
to Global Food Crisis, New Report Finds

Financial and Food Crises
Linked By Extreme Price Volatility in Deregulated Markets

Minneapolis – Excessive speculation in agriculture commodity
markets has played a major role in the rapid rise and fall in global food
prices, contributing to a massive increase in undernourished people and
commodity market instability, according to a new report by the Institute for
Agriculture and Trade Policy (IATP).

“As President Bush and the G-20 meet this weekend, it is
important to recognize that many of the deregulatory measures that brought on
the Wall Street collapse also contributed to the food security and agricultural
market crises,” said IATP’s Steve Suppan, a contributor to the report. “Only
prudential regulation and tough enforcement will repair the damage caused by
crony capitalism to these markets and the people markets are supposed to
serve.”

The IATP report, “Commodities Market Speculation: the Risk
to Food Security and Agriculture” (available at www.iatp.org),
concludes that U.S. government deregulatory steps opened the door for large
financial services speculators to make huge “bets” that destabilized the
structure of agriculture commodity markets. According to the United Nations,
global food prices rose an estimated 85 percent between April 2007 and April
2008. Prices rose for wheat (60 percent), corn (30 percent) and soybeans (40
percent) beyond what could be explained by supply, demand and other fundamental
factors, according to the report.

Commercial speculation in agriculture has traditionally been
used by traders and processors to protect against short-term price volatility,
acting as a sort of price insurance while helping to set a benchmark price in
the cash market. But the elimination of speculative position limits for
financial speculators and the rise of commodity index funds undermined
traditional price risk management. These funds create a constant upward
pressure on commodity prices, alleviated abruptly only when fund contracts are
“rolled over” to take profits.

“The underlying fundamental for these funds is not the
supply and demand of physical commodities, but the profit target,” said Suppan.
“As long as Wall Street players could hide their government-permitted debt
loads, they were free to induce price volatility in excess of what could be
explained by fundamental factors, and then profit by betting on the induced
price movements.” 

As of July 2008, $317 billion had been invested in
commodities index funds, led by major traders Goldman Sachs and American
Insurance Group. Commodity index funds bundle futures contracts of up to 24
agricultural and non-agricultural commodities, including oil, energy, and base
and precious metals. The bundling of agricultural commodities with precious and
base metal commodities means that the price movements (and the larger trading
weight of the metals in the fund) can trigger the sale of a fund contract,
regardless of the supply and demand situation in an agricultural commodity,
according to the report.

At the global level, there is no multilateral agreement to
regulate commodities exchange markets. And there is no multilateral framework
to respond to global speculation in food prices. Thus far, the UN’s Global Task
Force on the Food Crisis has yet to analyze the role of speculation in
fomenting the crisis.

The report makes a series of recommendations including:
creating an independent global commodities exchange regulatory agency,
establishing commodity-specific speculative position limits and requiring
comprehensive and transparent reporting for all types of futures and options
trades executed in the United States. On September 18, the U.S. House of
Representatives passed the Commodity Markets Transparency and Accountability
Act of 2008, which would take some of these initial steps. The bill will likely
be reintroduced in 2009.

“The U.S. House of Representatives has begun to defend U.S.
agricultural markets from predatory deregulation and excessive speculation,”
said Suppan. “The Obama administration and the U.S. Senate should not only
support and improve the House bill, but help jumpstart multilateral
negotiations so that excessive speculation in non-U.S. markets cannot further
exacerbate global food security.”

The full report can be read at: www.iatp.org

The Institute for Agriculture and Trade Policy works
locally and globally at the intersection of policy and practice to ensure fair
and sustainable food, farm and trade systems.