Agriculture ministers from the Group of Eight (G-8) and major developing nations claimed this week in Italy they were ready to fight food insecurity by cracking down on speculation. This might make politicians feel good but the evidence shows that alleged speculation had nothing to do with the food crisis: the real cause was bad policies.
Since their peak in 2007 and 2008, cereal prices have fallen and, in some cases, halved. But for many people, prices are still above pre-crisis levels, especially in developing countries. The World Bank estimates that the food crisis pushed around 150 million people back into absolute poverty in the last two years. Worse, it predicts prices will stay high until 2015.
The agriculture ministers Summit in Treviso promised to study factors potentially affecting commodity market, including speculation but Italian Agriculture Minister Luca Zaia went much further, saying: One of the main aims is to prepare efficient tools to fight financial speculation. French Agricultural Minister Michel Barnier conjured up “speculators preying on primary foodstuffs, which is scandalous, echoed by Oxfam, Save The Children and other pressure groups.
The African Union Commission proposed actions that will calm markets with market-oriented regulation of speculation, at a meeting last June.
Given the current financial turmoil, traders are attractive scapegoats. In reality, futures markets are complex and poorly understood – and benefit both producers and consumers. Speculators do gamble on which way markets will move in the future but, if they want to win, their bets must be highly informed, predicting future supply and demand. Futures markets thus indicate how prices will move, providing strong incentives for suppliers to adjust production to meet future demand. This information from numerous markets is something no government could ever replicate.
As to speculation in the latest food crisis, there is absolutely no evidence that any person, group, or firm started trying to corner the market in food crops, 12 to 18 months beforehand. Given the sheer size of the global food economy, it is virtually impossible. There have been some rare similar attempts in the much smaller metals markets and they have failed miserably.
Investors are not the only people who bought commodities in anticipation of higher prices: many Asian households hoarded rice, while importers accelerated grain purchases. This pushed food prices up, for the very simple reason that futures markets are driven by the same forces as any other markets – supply and demand: there is nothing sinister about this nor any sane measure that could prevent it.
Imposing regulations or setting up stockpiles of essential foodstuffs – as suggested at the Summit – will do little to ease world hunger or avoid future price rises. When a massive shortage of onions caused their price to rise back in 1958, US politicians decided to ban onion trading on futures market: this ban still remains but their price has shot up an astounding 420 percent since 2000, far beyond the price of other food.
So what caused food prices to rise so rapidly two years ago? The World Bank says “the prevailing consensus among market analysts is that fundamentals and policy decisions are the key drivers of food price rises, rather than speculative activity. Biofuels, for example, diverted one-fourth or more of US crops and led to higher maize and other commodity prices while costing the US taxpayer $7 billion every year – turning cheap food into expensive fuel.
Other bad policies have been around longer than biofuels. The final Summit declaration says “we need to sustain the benefits of globalization and open markets, highlighting the crucial importance of rejecting protectionism – yet 28 countries still maintain export bans on agricultural goods and many more have subsidies, quotas or tariffs on food, fertilizer and other farm inputs, the World Bank says.
Lack of property rights also repress crop yields: Ukraine, like many countries, could easily double its yields on existing cropland, from an average of 2.3 tonnes per hectare to 4 or 5 tonnes. But without the security of ownership and the chance of raising loans with their land as collateral, farmers there and in many poor countries around the world cannot and dare not invest in improvements.
Politicians must resist attacking straw men and aim instead at their own damaging policies. If they want to ease food prices and reduce hunger, they must open their markets and free their farmers.
Douglas Southgate is Professor of Agricultural, Environmental and Development Economics at Ohio State University and author of Feed the World, an International Policy Network report.
