The relationship between financial speculation and food can be traced back to 350 B.C. in Aristotle’s story of philosopher ‘Thales the Milesian’. Thales, trapped in poverty, wished to procure himself some form of small fortune. He predicted a strong oil harvest for the coming year and, therefore, preceded to pay the olive press owners a fee to secure the rights to their land. After a huge crop, the demand for olive presses soared, enabling Thales to escape poverty as he sold on the rights of olive press’ to highest bidder. As a result, the story is thought to be one of the first examples of derivative trade in history.
Now in the modern day, the market volume of Derivatives is one of the biggest in industry. The European Securities and Markets Authority calculates that, in the EU alone, the Exchange-Traded Derivatives market has an average daily turnover of 1.3 trillion euros, including trade on food commodities. For example, during the ‘fat’ years of 2003-2008, as food consumption increased rapidly, the total market investment was seen to jump from $3 billion to over $55 billion.
This lead to a rapid increase in the cost of food during this period. The Oakland Institute calculated that prices rose by 83% between 2005 and 2008 and essential foodstuffs such as wheat, maize and rice soon became unaffordable for many (Mittal, 2009). This drove nearly 40 million more people into hunger (von Grebmer et al, 2008) with an overwhelming majority of these individuals hailing from urban areas within developing countries (Trostle, 2010).
Unsurprisingly, many researchers began to notice links between the two phenomena. This led to an ongoing debate as to whether the trade of derivatives alongside foodstuff can be considered an underlying cause of the crisis. UN food expert, Olivier DeSchutter, points out that ‘a significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble’. He uses the rapid surge and fall of the cost of maize, rice and wheat (see Chart 1) to support his argument.
Many academics, as well as campaign organisations such as the Global Justice Movement, argue that the financialisation of the food market causes a form of ‘profit without producing’, as speculators capitalise on the back of starvation. Therefore, such groups often call for greater regulation surrounding the issue in order to try curb the current volume of trade. Although the claim is still yet to be certified, in 2014 the EU created the Market in Financial Instrument Directive (MiFID) which limits the number of contracts which can be granted for agricultural commodities (e.g. wheat, corn, sugar) and provides tighter regulation around high-frequency trading (European Commission, 2014). The UK, however, refrained from implementing these proposals.
However, despite such action being taken, some dispute the blame placed upon speculation for rising food prices. Nobel Prize Winner, Paul Krugman, argues that the claim cannot be supported as there is insufficient evidence of physical stocks being hoarded. In contrast, he argues that the surge of increasing prices was caused by the excessive demand in emerging markets, as opposed to financial speculation. Krugman instead suggests that, in terms of supply, production may have fallen due to irregular weather and could therefore be, perhaps, considered a consequence of climate change.
The impacts of the new regulation also seem difficult to predict. Anna Chawick (2015) contends that seeing tighter regulation as the universal solution creates ‘legal black hole’. The reason for food scarcity and price volatility, Chadwik explains, is due to the structure of the food market itself – the empowered monopolistic agribusinesses causing divisions in the market between the ‘core’ (the Global North) and ‘periphery’ (the Global South). Therefore, she would argue that the simple answer of ‘more regulation of financial markets’ cannot be the sole cure.
Chadwik, A. (2015) Food Commodity Speculation, Hunger, and the Global Food Crisis: Whither Regulation, The London School of Economics and Political Science.
DeSchutter, O. (2010) Food Commodities Speculation and Food Price Crises. Regulation to reduce the risks of price volatility
European Commission (2014) Markets in Financial Instruments Directive (MiFID): FAQ, [online] European Commission Press Release Database. Available from: http://europa.eu/rapid/press-release_MEMO-14-305_en.htm (Accessed 15 April, 2014).
Mittal, A. (2009) The Food Price Crisis: Rethinking Food Security Policies. G-24 Discussion Paper Series, UNCTAD: No.56, 1.
Trostle, R. (2008) Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices. A report from the Economic Research Service, United Staes Department of Agriculture.
von Grebmer, K., Fritshwl, H., Nestrova, B., Olofinbiyi, T. et al. (2008) Global Hunger Index: The Challenge of Hunger, Food and Agriculture Organisation of the United Nations.