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.
Source: Michael Masters testimony before the Commodities Futures Trading Commission, 25 March 2010
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.
Source: Bloomberg, MTN-I, ETP issuer data, Barclays
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).
Source: Lagi, Bertrand and Bar-Yam (2011)
References:
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
-World Development Movement: Back to Fundamentals
-Friends of the Earth: Farming money
–Oxfam: Not a Game: Speculation vs. Food Security
-Foodwatch: The Hunger-Makers
– Alan Bjerga, Endless Appetites: How the Commodities Casino Creates Hunger and Unrest
– SOMO: Dutch financial institutions speculate in food markets
– SOMO: Feeding the Financial Hype
-Extract from Finance Watch’s “Investing not betting” report, including proposals to set limits on commodity speculation.
Press articles
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”
Auf Deutsch
30-8-2012 WDR Das Erste – Monitor “Geschäft mit dem Hunger, Wie deutsche Banken mitverdienen”
