Another Call for Regulating Food Commodity Speculation
Stephen Spratt of the Institute for Development Studies recently published an engaging paper (and a much shorter but equally engaging blog entry) making the case for regulating speculation in food markets. (Hat tip to Duncan Green’s From Poverty to Power blog for the link). Spratt cuts through much of the dense language that frequently surrounds this topic to provide a clearheaded analysis of the impact of financial markets on food prices.
Importantly, Spratt disaggregates various kinds of actors and investors. It’s important to remember that there are key differences between types of investors and their motivations. While many are engaged in buying and selling futures contracts for food, not all futures trading is necessarily speculative; nor does all futures trading have a negative impact. Futures markets play an important role, for example, in price discovery and in ensuring liquidity for farmers. But that’s a far cry from the current system of gambling on food prices.
As Green rightly notes, Spratt’s analysis is particularly important in its conclusions around the costs and benefits of regulating speculation in food markets. In a move that echoes the climate change debate, opponents of regulation argue that there is no clear evidence that speculation is the most important driver of higher food prices or of the increasing price volatility in global commodity markets. Without such evidence, opponents of regulation argue that the market should be left free, and that the state should keep its nose out.
Spratt arrives at a different conclusion, though. Echoing the precautionary principle, he concludes that,
The policy responses that different commentators favour are strongly influenced by two things. First, their view on the link between increasing financial speculation in futures market and price movements in spot markets. Second, their view on the relationship between financial market prices and underlying economic fundamentals. Reasonable people take different view on these questions, and it is not possible to answer them definitively. On the balance of evidence, however, we have proposed the cautious use of the precautionary principle, largely because of the fundamental importance of global food markets to the lives of billions of people.
Set against this, the ‘costs’ of placing greater curbs on financial participation in food markets seem relatively trivial. Some argue that reducing speculation would reduce market liquidity, increasing hedging costs. But there has been no reduction in hedging costs as financial engagement has grown. The only real cost, therefore, may be a reduction in the profitability of some financial institutions. Set against the potential benefits, this seems a price well worth paying.
Reminds me of Joel Pett’s fantastic cartoon from the USA Today:
Now the real question is how to move the debate forward.