Food prices have climbed to unprecedented levels in recent months. 200 million people already faced acute food insecurity in 2021, almost double the figure from 2016. People across Ethiopia, South Sudan, southern Madagascar, and Yemen were on the “verge of starvation and death”, A UN report advised. Financial investors are cashing in on rising food prices.
As early as October last year, and months before Russia invaded Ukraine, Teucrium was encouraging investors to profit from rising food prices. “While food inflation threatens to negatively impact the global economy, informed investors could potentially benefit from a trend of rising prices,” a portfolio manager in the fund wrote in a piece on the Teucrium website.
Olivier De Schutter, UN Special Rapporteur on Extreme Poverty and Human Rights and co-chair of the International Panel of Experts on Sustainable Food Systems (IPES-Food), said that speculative activity by hedge funds, investment banks and pension funds can adversely affect hunger levels and poverty across the world.
“They are indeed betting on hunger, and exacerbating it,” he said. "...There should have been more fundamental recognition that food is not a regular commodity like gold to buy and sell, it is a basic human necessity.”
An investigation by the Lighthouse Reports, a European nonprofit newsroom found that excessive speculation by investment firms and funds in the commodities markets has contributed to the spike in prices. The industry and its lobbyists have sabotaged efforts to rein in such behaviour.
In the last two years investment funds and firms increased their stakes in agricultural commodities. In the Paris milling wheat market, the benchmark for Europe, speculators’ share of buy-side wheat futures contracts has increased from 23% of open interest in May 2018 to 72% in April 2022. In other words, by April this year, seven in 10 buyers of futures wheat contract were speculators in the form of investment firms, investment funds, other financial institutions and commercial non-hedgers whose aim was to profit from the rise in prices. Investment firms increased their presence in the buy side of the wheat futures market in Paris from 4% of open interest in 2018 to 25% in April this year. During the same time, investment funds increased their presence from 1% to 21% of open interest. The price of Paris milling wheat increased by a massive 38% in less than two weeks from € 287 per tonne on February 23 (a day prior to Russia’s invasion of Ukraine) to € 396.5 on March 7. Around the same period, investment funds increased their net long positions (indicating a net propensity to buy) by 43%. The price hit a high of € 418 on April 27.
Between January 2020 and March 2022, investment funds increased their net buying positions by almost four times, data from Euronext, Europe’s leading commodity exchange, shows.
Michael Masters, a global expert on the subject of speculation in commodities markets, back in 2008, as prices of food spiked, told a US house senate committee that speculators were buying up essential commodities with the sole purpose of “reaping speculative profits.”
He now observes that, “If speculative actors are most of the open interest, it follows that their incentives and their motivations are going to be dictating price formation. So when they’re the majority of open interest, you get a lot of price formation that has to do with trend following or amplification of price trends,”
Jayati Ghosh, professor of Economics at the University of Massachusetts Amherst, who has also closely studied the role of speculation in the spike in food prices in 2008, 2009 and 2011, concurs with Masters that the data from the Paris market points towards speculative activity.
“The fact that these are investment funds engaged in this activity is very important because investment funds have no direct interest in the commodity, they see it only as an asset class. Otherwise, if it’s a grain trader or if it’s anything else they can say, well, look, we are hedging because we anticipate supply shocks because of the Ukraine war. But these are investment funds, that are only interested in financial (speculative) returns.” Ghosh said. “Because along with the food price increases, you have livelihood collapses and wage income collapses in most of the developing world. So you’re talking about people with lower money incomes facing even higher prices. It’s much worse than 2008.”
“Given the price dynamics, it is difficult to ignore that that bullish view (of financial institutions in the wheat market) has led to price increases. The financial speculation seems to have exacerbated price dynamics,” David Bichetti, who is an economist at the United Nations Conference on Trade and Development (UNCTAD), said.
Data from the US-based Commodity Futures Trading Commission (CFTC) also show increased speculative activity in wheat in the Chicago Board of Trade (CBOT), the world’s oldest futures and options exchanges.
Managed money have been buying long futures contracts of Soft Red Winter wheat following Russia’s invasion of Ukraine. Together with swaps dealers, they owned 58% of long futures-only contracts, their highest combined share since 2014, just as Chicago wheat hit its peak in early March.
”This is a strong indicator of excessive speculation,” said Steve Suppan, policy analyst at the Institute for Trade and Agriculture and Trade Policy and a leading global expert on speculation in food markets.
Money managers also hold record levels of Minneapolis wheat futures and options, increasing their net positions by 180% between mid-February, before the war started, to April 19. Reuters reported similar findings across grains and oilseeds. The net long of 19,867 contracts means that money managers had entered legal agreements to buy 99.335 million bushels of hard red spring. That equals almost 20% of the total harvested crop of 2021.
Many food import-dependent developing countries – like Lebanon – are in financial turmoil due to currency devaluation and declining foreign currency reserves.
“In terms of your own currency, you’re paying even more. So your ability to buy food in the world market is constrained. You have food importers impacted very clearly,” Ghosh said.