Food for thought

What is speculative trading and how can it lead to food poverty?


In 2008, the global price of rice and other basic food staples soared, prompting widespread panic across the world and triggering food riots in more than 30 countries.

By December that year prices had levelled off but history repeated itself in 2011 with another round of price spikes, leaving many economists to speculate about the causes for the volatility.

Climatic factors were one theory. High oil prices another, along with links to the burgeoning biofuels industry creating a shortage of grain, and changing diets in emerging economies.

According to PhD student Anna Chadwick, none of these factors, alone or combined, provides a sufficient explanation for the price inflation.

The Department of Law doctoral candidate, now in the third year of her PhD, is investigating the role that derivative markets and the law play in food price volatility and global hunger.

“The volatility and extent of the price inflation in 2007-08 and again in 2010-11 cannot be explained by fundamentals of supply and demand,” Anna says.

“Attention needs to be paid to the influence of floods of speculative financial investment into commodity derivative markets in the years leading up to the price crisis.”

Derivative instruments were implicated in the global financial crisis, leading G20 member states to propose a raft of reforms to that sector. While not a direct link to food poverty, Anna says financial instability during the GFC no doubt contributed to the food price volatility.

Speculative trading revolves around short-term, high-risk trades which are profit-driven and often transacted through derivative instruments such as commodity index funds which group commodities together.

“Commodity derivatives began life as insurance contracts designed to enable farmers and manufacturers to protect their commercial investments against adverse market movements,” Anna explains.

“However, these basic contracts have developed into sophisticated financial derivatives that enable traders to profit from market fluctuations.”

Financial investment in these index funds has quadrupled since 2005 from less than £60 billion to more than £240 billion in 2011, contributing to elevated food prices, which the World Bank calls the ‘new norm’.

As part of her thesis Anna is also challenging perceptions about the role that law has played in this scenario.

“The dominant view is that food speculation was born of a legal vacuum, but I dispute this,” she says. “The law has been there all along and has been complicit in allowing speculative trading to influence the prices of basic food commodities.”

“The law – and international regimes in particular – have been instrumental in allowing these derivative markets to flourish, leaving poorer communities vulnerable and at the mercy of rampant volatility where food prices are concerned,” she says.

Anna is expected to complete her thesis in 2015.

Posted: 12 May 2014