The Impact of Speculators on World Food Prices

There has been a lot of concern over the past few years about the volatility and general rise in global food prices, as I have commented on before. Without question the demand for food is rising at a pace greater than the rate of population growth, and prices are influenced by weather-related events that affect harvests. But, according to a story in The Guardian in the UK, there appears to be a more sinister force working in the background--financial speculators.

The activity of financial speculators is overwhelming agricultural commodities markets, fuelling global food price inflation and hunger, according to new analysis from the anti-poverty group the World Development Movement (WDM).Its report, Broken Markets, published on Tuesday, finds that financial speculators with no interest in the physical goods traded now dominate agricultural commodity markets. 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. 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.

Those people who constantly worry about government over-regulation need to be aware of the dangers lurking behind under-regulation. William Godwin was worried about the effect of greed and accumulation on the poor in the UK more than two hundred years ago--in a treatise that led to Malthus' famous book on Population. We obviously still need to be worrying about such things.