World Bank deaf on food speculation, vocal on financial instruments

13 September 2011

As agricultural markets continue to experience increasing volatility and record food prices intensify global hunger and poverty, the World Bank’s approach to the crisis, which emphasises the use of commodity markets and corporate agriculture, is found wanting by both those who demand food sovereignty and food security.

In May 2011 the International Financial Corporation (IFC), the Bank’s private sector arm, launched its new Agriculture Price Risk Management product (APRM) in conjunction with American investment bank JP Morgan. The launch of the programme coincides with appointment of Robert Kopech, who spent 19 years working at JP Morgan, as the Bank’s new Group Chief Risk Officer. The programme was developed in relative secrecy. The project proposal was posted on the IFC’s website in April without a name, and even two months after board approval the summary of proposed investment still did not include the name of the programme or JP Morgan.

According to an unreleased fact sheet, the APRM “targets emerging market agriculture producers and intermediaries that don’t have access to hedging instruments. By working with – among others – intermediaries such as cooperatives, the product will also improve access of smaller producers who might not be able to have access to price hedging products by themselves.” The Bank claims that the APRM will help boost access to credit for producers, reduce the impact of price volatility, and create greater access to affordable food through cost stability.

Indian economist Jayati Ghosh questions these claims: “It is increasingly evident that price volatility in major commodity markets is strongly associated with financial activity in these markets, including of the major global banks. In this context, the APRM proposal is truly bizarre, amounting to public money being used to subsidise financial players that already have huge conflicts of interest in a sector characterised by massive information asymmetries. Farmers and consumers in the developing world need support in the form of minimum support prices for producers and stable prices for consumers, which can be delivered through public procurement and distribution systems. This is where the World Bank should be putting its money, not in getting poor people more involved in a complex web of financial products that they cannot control.”

In June G20 agricultural ministers met to discuss ways to tame global food price volatility, but reached only a minimal agreement on transparency. Sophia Murphy of the US-based Institute for Agriculture and Trade Policy noted that “on some of the major agricultural issues, including biofuels, stocks and trade rules that support food security, the G-20 Ministerial can only be judged a failure.” Notably, any binding decision on how to address the role of increased speculation in commodities markets and its impact on price volatility was pushed back to the G20 finance ministers meeting in September.

A policy report for the ministers, coordinated by the UN’s Food and Agriculture Organisation and the OECD, with contributions from the Bank and the IMF, did accept that “financial markets probably acted to amplify short term price swings and could have contributed to the formation of price bubbles”. It underlined that debate still continues on the extent of this influence. While remaining broadly equivocal on speculation, the report does maintain that “it is clear however that well functioning derivatives markets for agricultural commodities, could play a significant role in reducing or smoothing price fluctuations”.

The report includes an entire section on the potential of producers using hedging instruments to insulate themselves from price volatility. The similarity in tone and policy prescription to the IFC’s rationale for the APRM indicates that the Bank had a hand in the authorship of this section. A “menu” of policy approaches for G20 ministers to consider includes: “intermediation of financial commodity hedges by multilateral development banks and international financial institutions; and risk-sharing the underlying credit exposure in order to expand the reach of these tools, as is planned through the IFC’s proposed Global Agricultural Price Risk Management Product.”

A paper by the head of the French development agency, which was submitted for consideration by G20 agriculture ministers, is also ambivalent on the role of commodity speculation, while advocating multilateral development bank-led hedging instruments. The report argues that “spikes in volatility have been recurrent throughout history, and volatility of domestic food prices has been a constant concern, and it is as necessary to devote some attention to managing volatility as it is to trying to prevent it”, and recommends “the government, the G20 and donors facilitate access to microeconomic and macroeconomic hedging instruments and catalyse private sector dynamism.” Again the APRM is specifically mentioned, before the report advocates that the “G20 could support the initiative led by the World Bank to develop risk management instruments”.

Brewster Kneen and Cathleen Kneen, members of global network the International Planning Committee on Food Sovereignty, warn against the dangers of such an approach. “The farmer’s crop becomes an anonymous financial unit at the base of a wide-open trading pyramid, most of which will be speculative – the source of volatility. Volatility is the basis for the irrational wealth accumulation of well-fed speculators who are literally capitalising on the fear and actuality of starvation for millions of people. For all but the very largest corporately allied industrial farmers, entry into the futures market is a step into a world controlled by finance capital and dependency on corporate entities whose interests are not those of the subsistence or even small and medium sized farmers, or even of the public.”

A recent article by Carlos Oya, of the University of London, explores the Bank’s approach to the global food crisis. Reviewing the Bank’s research, advocacy and policy on agriculture from the 1960s onwards, he finds that despite many contradictions and tensions between different outputs, there “emerges a consistent pro-liberalisation message”, despite “decades of neoliberal experiments in developing countries, contradictory global tendencies and the latest global food crisis”. He finds that the Bank tends to characterise the food crisis as a “one-off episode” underpinned by a set of ‘real economy’ based production and demand conditions, including the expansion of bio-fuel production and energy price increases.

In doing so Oyo argues that the Bank consistently denies the role of “financial speculation in driving price volatility in food markets”. Oyo finds that “the Bank has used its assessments of the global food crisis to enhance the marketing of what were some of its preferred products prior to the onset of the crisis, including ‘innovative’ private insurance mechanisms to deal with price … [and] the promotion of rural financial markets to smooth risks faced by farmers”. Therefore, “the World Bank demonstrates respect for its core deregulation agenda, while acknowledging the significance of market risk and volatility”. This means that “palliative and market-friendly preventative measures to deal with risk and vulnerability are likely to assume more prominent roles in the Bank’s and other donors’ work as a result of the crisis”.