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Why leveraged soya beans are weird and wrong


Food isn't the first thing that springs to mind when you think of the abstract world of high-finance. But over the last decade, as other markets dried up, investment banks and hedge funds have alighted on food derivatives as a new place to grow their money.

Ever since, food prices have started to behave in strange ways. Wheat has shot up in price and crashed down again; the price of maize – the staple food for over 300 million of Africa's most vulnerable citizens – has trebled since 2005.

And so, while banks are busy encouraging investors to bet on derivatives based on everything from maize to 'leveraged soya beans', all of a sudden households in the developing world cannot afford to eat.

Now it would be a mistake to name speculation as the only pressure on our stressed global food system. But it would be right to pinpoint it as one of the most odious – and, in theory at least – one of the easiest to put right, with tighter market regulation.

Fresh soya beans on the stalk (pre-leverage). Photo by Ricoeurian under a CC license

The issue already has some traction in political circles. French premier Nicolas Sarkozy has made price volatility one of the cornerstones of his G20 presidency, and rails against speculation as 'extorsion' and 'pillaging'. Last weekend, on 15 October, G20 finance ministers concluded a Paris meeting where they were charged with deciding what limits to impose on financial players in commodity markets, as well as articulating the more headline-grabbing G20 response to the euro-zone economic crisis. But Britain, the US and Brazil put up staunch opposition, and the ministers failed to commit to tough controls, according to campaigners at the World Development Movement. 

'From fire department to police department'

This week, all eyes will be on the US, which already allows for tighter restrictions than Europe. The besieged Commodities Futures Trading Commission (CFTC) (the top US regulatory authority) is due to set caps for traders' holdings in commodity markets on Tuesday 18 October. One commissioner, Bart Chilton, has said he hopes the CFTC can go from being the 'fire department' to the 'police department'.

But the hugely powerful financial services lobby has piled on the pressure ever since the 2010 Dodd-Frank Wall Street Reform Act first introduced the proviso for limits on financial speculation. Commission chairman Gary Gensler has complained that the CFTC has held 1,000 meetings to hear comments relating to the rule, and that the 'vast majority are from large financial institutions'. The combined forces of Republicans and financial lobbyists has already repeatedly delayed the final ruling.

Next up is Europe. Two days after the US ruling, the European Commission is due to announce its review of MiFID (the 'Markets in Financial Instruments Directive'), the EU's answer to the Dodd-Frank Act. Michel Barnier, European Commissioner of the Internal Market, has described speculation in basic foodstuffs as 'a scandal when there are a billion starving people in the world.' It remains to be seen how much of this rhetoric will translate into regulation.

Waiting in the wings for later in the year is a UN resolution against food speculation tabled by the Dominican Republic.

Cat and mouse game

Will any of these initiatives work? There can be no doubt that financial institutions are paying very close attention. All this push-back at least suggests the regulators – if they stand their ground – do have the power to shut down this particular income stream for the money managers.

There are very valid fears that watered-down rules in the US and Europe will be too weak to have a major impact on food speculation, as financial players will find a way round them.

But we should welcome these important first steps towards returning food to its primary function – that of feeding the hungry, not performing as a lucrative asset class for wealthy elites. This has got to be raw-edged capitalism at its worst. And with protests against greed and injustice springing up in financial districts across the world, there could not be a better moment to call time on the food speculators.

The November edition of New Internationalist, 'Banking on Hunger' tackles food speculation head on, with analysis, facts and illustrated guides to the major players. The magazine is available from high street WH Smiths, in digital format or by subscription.

To find out how you can help push for limits on food speculation visit WDM (Britain), Better Markets (US), People first not finance (EU), or Stop Gambling on Hunger (US). 

This post was orginally posted as New Internationalist's contribution to the 2011 Blog Action Day on food on 16 October. It was revised and updated on 18 October.

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