Financial and food crises

probing the links

27 November 2008

While food commodity prices have dropped from their peaks earlier in the year, the role financial liberalisation played in causing the crisis and whether it can help resolve it are still being debated. Annie Shattuck an analyst at NGO Food First suggests that speculative trading on the scale which contributed to food price increases would not have been possible without the financial sector deregulation and free market reforms required by IMF lending conditions. She argues that “looking for safer investments, traders that may or may not be in businesses related to food at all, put their money into commodities futures.” These investments in agricultural commodities and oil had a knock on effect on the price of food and farm inputs.

A report by the Institute of Agriculture and Trade Policy (IATP) published in November argues that the same deregulatory measures that played a role in the current financial crisis also contributed to the food security crisis which saw food prices rise 85 per cent between April 2007 and April 2008, far in excess of what could be explained by supply and demand. It finds that speculation, the process of betting on the future price of a commodity or financial asset, was a “major contributor to extreme price volatility, which is skewing agriculture commodity markets to such a degree that both farmers and consumers are losing out.”

Figures in the World Trade Report 2008 by UNCTAD show that trade in agricultural derivatives increased by 32 per cent in 2007, whilst their value has jumped up by 160 per cent in two years; there has been no correlating change in production.

The Fund, in the October 2008 World Economic Outlook, advocates monetary policy tightening as a means contain the inflation risks that it claims is still present despite falls in commodity prices.

Bank and derivatives

The Bank has placed renewed emphasis on risk management tools such as crop insurance and weather derivatives (financial contracts designed to pay out if production is affected by adverse weather conditions), offering Malawi index-based derivatives in June to “provide a hedge to protect governments against financial disruption in the aftermath of adverse weather events”. Despite the problems in the derivatives market related to the financial crisis, the Bank continues to have faith in market solutions.

The Bank’s response to the crisis, the Global Food Response Program (GFRP) (see Update 62, 61) has since mid-November approved and begun disbursing $359 million across 24 countries. A further $541 million is proposed for programs in 10 more countries.

Where there’s a will.

The IATP report makes a number of recommendations. Amongst them is the call for an independent global commodities regulator, the establishment of speculative position limits for specific commodities, and the lobbying of UNCTAD member governments to authorise the study of the effects agricultural commodity price speculation has at the national level.

To a large extent, progress in this matter is dependent on IFIs and governments having the political will to design, implement and enforce the necessary regulatory mechanisms.