Profiting from Hunger

Following up on an earlier post , the anti-poverty group the World Development Movement (WDM) says the spiralling food prices are being driven by financial players taking over commodities markets. Those on low wages in the UK and the poorest in developing countries are hit hardest, since they spend a larger proportion of their income on food. Financial speculators now account for more than 60% of some agricultural futures and options markets, compared to just 12% 15 years ago, the development group says. Those with direct commercial interests in food production used to be the main participants, but now hold less than 40% of the market compared with 88% in 1996. In the past five years, the total assets of financial speculators in these markets have nearly doubled, from $65bn in 2006 to $126bn in 2011 (20 times more thathe total amount of aid money given globally for agriculture).The result is that agricultural markets no longer respond to underlying fundamentals of supply and demand and fail to provide producers with an effective way to hedge their risks.

The WDM report identifies several types of investment made possible by deregulation in the past decade

1. Commodity index funds, which allow institutions such as pension funds to bet against movements in commodity prices. These funds are "long only", which means they only take positions speculating that prices will rise and they "roll" their positions, replacing contracts each month to maintain the same position in the market. These "massive passives" do not respond to the underlying fundamentals of supply and demand and so distort agricultural markets, WDM says.

2. Computerised high-frequency trading is adding to the volatility of prices and has led to "flash crashes" in the sugar and cocoa markets. In this kind of trading, past price movements are analysed and used for algorithmic trading for very short periods of time. For example, when prices of sugar and cocoa started to fall in late 2010 and early 2011 respectively, they triggered the computerised models to sell automatically, fuelling a downward spiral that saw sugar fall by 11% and cocoa by 12.5% in a single day.

3. Commodities exchanges now make their profit from the numbers of trades made, meaning they have a strong incentive to promote greater volumes of these sorts of speculative activities.

4. Over-the-counter trading, which takes place outside the regulated exchanges, has boomed. At present, only commodity futures and some options are traded on exchanges. The rest of the derivatives market is traded through unregulated bilateral deals between institutions such as banks and pension funds. Over-the-counter trading bypasses the requirement on the exchanges for traders to post margins, ie put up a sum of money to cover the risk they are taking on any contract. This absence of transparent risk management creates dangerous bubbles, according to WDM.

The report Broken Markets author Murray Worthy said "Millions more people are going hungry because reckless investment banks are using food prices to make massive profits." http://www.wdm.org.uk/stop-bankers-betting-food/broken-markets-how-financial-regulation-can-prevent-food-crisis

Barclays Capital's role in food speculation is driving up global food prices and leaving millions facing hunger and malnutrition. Barclays is the UK’s biggest player in food speculation and helps other financial players bet on hunger too. Barclays Capital is one of the top three players in commodity markets in the world alongside Goldman Sachs and Morgan Stanley. Barclays. Barclays is the UK banking sector’s market leader in food speculation and is the only UK bank that has any real presence in commodities trading. RBS has sold off its commodities division and HSBC is involved primarily in metal markets rather than food. Barclays' dominance in the commodities market is widely recognised within the financial industry itself: winning the Risk Magazine Award for Commodity and Energy Derivatives House of the Year for 2008, 2009 and 2011. It is estimated that Barclays could be making as much as £340 million a year from speculating on food. Barclays is also the leading European player in oil speculation which is driving up oil prices. Since oil is a key input in agricultural production, higher oil prices means higher costs of production and therefore rising food prices. While bankers are reaping huge profits from betting on food, poor families across the world are paying the price of hunger and malnutrition.