Banks make hundreds of millions by betting on the world’s food crisis while millions of people fight starvation. Metro takes a look at the workings of food speculation and what is being done to stop it…
YOU can bet the farm of the fact that someone, somewhere will be making a buck out of another’s misery.
Financial investors betting on the price of food are driving up prices, putting the lives of millions at risk, campaigners claim.
Last month, it was revealed Barclays had made about £500million over the past two years on food speculation.
In Britain, the average household food bill increases by about five per cent each year.
But in the developing world, where a higher proportion — up to 90 per cent — of income goes on food, rising prices can be a matter of life and death. There are many reasons for rising prices, including the weather. But food speculation is a major contributing factor, with the activity of investment banks, hedge funds and other financial players in commodity markets leading to high and unpredictable prices.
Barclays is one of three key global players, along with Goldman Sachs and Morgan Stanley, speculating on food commodities, including staples such as maize and wheat.
This autumn, chancellor George Osborne and other European financial leaders are heading to Brussels to hammer out a deal on the financial sector’s ‘speculation’ on food commodities.
The agreement will affect not only the cost of food in Europe but also the lives of poor people in developing countries across the world.
Regulations that were previously in place to protect those who grew or sell food were removed in the 1990s. With the amount of money to be made gambling on the markets, the banks, hedge fund managers and pension funds moved in. Financial speculation on food almost doubled between 2006 and 2011. In 2006, the value of financial assets in food markets was £40billion; by 2011, it was £78billion. Financial speculators now dominate commodity markets, holding more than 60 per cent of some markets in 2011, compared with 12 per cent in 1996.
While speculators do brisk business, food price rises can wreak havoc in the developing world.
‘If you’re spending 70 or 80 per cent of your income on food, you might have to take your kids out of school, you can’t afford medicines or you’ll sell off the few assets you have to provide for the future,’ said Deborah Doane, director of anti-poverty group the World Development Movement. ‘A short-term spike in food prices leads to a long-term crisis. It leads to massive amounts of starvation. The World Bank estimated another 44million people went hungry in the last year alone,’ she added.
Food price rises can also lead to riots and conflict.
A number of banks, including Deutsche Bank, have started to pull out of food speculation, a result of public pressure and the warnings of global financial experts, said Ms Doane, more than moral scruples.
But recent history shows that, left to their own devices, banks and financial institutions put self-interest and short-term profit before stability or greater good.
At the end of August, MEPs in the European Parliament’s economics and monetary affairs committee voted to curb food price speculation.
The European Parliament is putting together draft proposals against the practice as part of the Markets in Financial Instruments Directive, which still needs full approval from EU member states to become law. The World Development Movement and others are calling on Mr Osborne and EU leaders to limit the amount of speculation allowed in commodity markets.
‘We want to see “position limits” reintroduced which stop the amount of hot money flowing into these markets,’ said Ms Doane.
‘It still enables companies using food commodities in their businesses to protect their risk and farmers to protect themselves, but it doesn’t allow prices to be driven up an exorbitant amount by the finance sector. Britain and financial lobbyists in the City of London don’t want position limits. They want as much flexibility as they can possibly have.
‘The second thing we want to see is transparency. A lot of what happens is behind closed doors. It’s dominated by financial sector lobbyists trying to influence the decision.’
Ms Doane sees Mr Osborne and the British government’s position as one that tends to see anything that gets money moving around as a good thing.
‘They’re one of the main opponents of tough regulation,’ she said. ‘They want what’s called “position management”, which is basically what we have now: a licence to intervene if they need to. The reality is they never use that licence and haven’t in the past. They’re quite happy for financial players to be making as much money as they can possibly make.’
She added: ‘If George Osborne is going to show leadership over the financial sector, whose track record in curbing their own excesses has not been good, and to do what’s best in the public interest, he should step in and accept regulation. None of the investment pouring into these markets is going into increasing production to deal with food shortages.
‘If they dilly-dally, we’ll lose a generation of people in some of these poor countries.’
Oxfam is also calling for regulation and transparency. Robert Nash, policy adviser for the charity, said: ‘The UK and EU need to resist the opposition of the banking lobby and grasp the opportunity right now, this autumn, to make sure new rules governing EU financial markets bring in full transparency and robust regulation, like “position limits”, to curb the rise in speculative trading.
‘These rules can tame commodities markets and help ensure they serve their primary purpose of helping food producers and buyers manage their risks and get a good price.’
FACTS AND FIGURES:
– Poor households in developing countries tend to spend between 50% and 90% of their incomes on food, compared to an average of 10-15% in developed countries
– In the last six months of 2010 alone, more than 44m people were driven into extreme poverty as a result of rising food prices
– About 1billion people worldwide don’t have enough to eat, which translates to 1 in 7 people
– During the 2007-8 food price crisis, food riots took place in 31 countries
–In the last five years, the amount of financial speculation on food has nearly doubled, from £40bn to £80bn
– The average British household’s annual food bill was £152 higher in 2011 than in 2010
– In July 2012, world food prices jumped 10%. Maize prices hit a record level after rising 25% in that month
– Between January and August this year, maize prices rose by 174% in Malawi.
– 1/3 of people in sub-Saharan Africa are hungry and the figure’s growing.