In any financial market, it is helpful to have a small proportion of speculators. Their activity – buying and selling to benefit from price changes – helps other investors to trade quickly, especially when other counterparties cannot be found. This is true for commodity derivatives as well.
But there is another side to the story. Click the picture above to see a short video explaining the problem.
Part of the story is that in less than 10 years, the proportion of speculative activity in this market has jumped from 30% to more than 70%. This has changed the dynamics of the market, with consequences for producers, wholesale buyers and consumers alike.
The growth in speculative trading is largely the result of new investment products that channel savings into commodity “investments” (Exchange Traded Funds or ETFs). In fact, these products are channelling savers’ money into derivatives.
With commodities closely linked to food and fuel prices, vulnerable households suffer the most and the consequences are serious. The chart below overlays the rise in food prices with social unrest (deathtolls in brackets).
Animation by WEED (World Economy, Ecology and Development)
Report by Al Jazeera, courtesy of World Development Movement
Reports and books
-Frequently upgraded bibliography of academic evidence by Markus Henn
-Foodwatch: The Hunger-Makers
-Extract from Finance Watch’s “Investing not betting” report, including proposals to set limits on commodity speculation.
17-10-2012 Actu-Environnement La spéculation sur les matières premières alimentaires nuit à la réputation des banques
6-3-2012 Wired Science “Speculation Blamed for Global Food Price Weirdness”
16-1-2012 Der Spiegel “Speculation is an Important Cause of High Prices”
30-8-2012 WDR Das Erste – Monitor “Geschäft mit dem Hunger, Wie deutsche Banken mitverdienen”