This illustrated fact sheet appeared in our November issue ‘Banking on Hunger’ (available from our shop as well as by subscription) alongside ‘The Food Rush’, an investigation into commodity speculation.
A food speculator bets on the prices of staples such as wheat, soya and oilseed, to make a profit.
Technically speaking, they are investors who trade in ‘agricultural derivatives’ based on ‘futures’ – or agreements to buy or sell foodstuffs at a certain price for delivery at a later date.
Originally, farmers and food companies traded futures contracts as a way to secure supply and income over the year. Later, commodities were traded on public exchanges.
These ‘agricultural derivatives exchanges’ – such as the Chicago Board of Trade – are where financial speculators get involved, simply to bet on the future price of grains, lean hogs or pork bellies.
They do not plan to take delivery of a tonne of wheat for milling into flour, or a hog of any size.
It may come as no surprise that banks are behind a new wave of speculative investment in food futures.
Banks have transformed edible ingredients into a formula called a ‘commodity index’. This turns food futures into an asset that acts like a stock or share, where all-comers can grow their cash.
Investment banks charge for enabling this novel, passive way to speculate on food, while also actively playing the markets with their own in-house traders (‘proprietary trading’).
Savers may be unaware that their pension fund managers are sinking vast amounts of cash into food exchanges through the commodity indexes cunningly designed by banks.
These funds are drawn to agricultural goods (or ‘ags’) because they balance out their portfolios – tending to go in the opposite direction to bonds.
Now everyone can get in on the action. ‘Retail investors’ are getting an appetite for ‘structured investment products’ that track the price of foodstuffs such as wheat and maize.
Banks and investment companies offer hundreds of these ‘Exchange Traded Commodities’, which are based on the banks’ commodity indexes.
Hedge fund managers are classic profiteers. They take large risks with the money of a small number of wealthy individuals.
Viewed as the cut-throat cowboys of the finance industry, they bet aggressively on falling or rising food prices, hoping for big bucks.
Like bank traders, they can use computerized, high frequency ‘algorithmic trading’ to make gains from minuscule price movements.
These powerful, commercial firms deal in the real business of buying and selling cereals but they are not averse to playing speculative games of a more abstract nature too. Grain traders use their inside knowledge of the market to act like quasi-hedge funds, aggressively punting on the price of grains. Rumour has it they had a hand in Russia’s recent wheat export ban and profited accordingly.