Financialisation of Food

Financial imperatives drive a food industry that destroys the environment and gives low quality nourishment to most.

Why should we be concerned?

Land has become just another financial asset class, as has agriculture. Another sector for financial markets to hold their money and to buy and sell within.

This matters because the demands of finance change the way in which we grow food. Investors require forms of agriculture that are easy for them to understand and fit their needs, above all projects that give short term financial profits and can be carried out on a massive scale. In this system, environmental factors are essentially absent from any calculation about which agriculture to practice and which not. It favours large-scale, monoculture, chemical-aided agriculture using petrol- guzzling machines. Farming like this is a major contributor to environmental breakdown – for example if we carry on degrading top soil as we are now we might have only 60 harvests left before the soil becomes so poor it cannot feed us. Even today, our food system is highly unequal – producing poor quality food for the majority of people, increasing disease and obesity.

In addition, finance brings volatility to food prices because it is largely concerned with trading for short term price gain. Investment funds shift huge amounts of money in and out of sectors on a short term basis. The price changes linked with these flows can bring financial ruin, through no fault of their own, to farmers who have much longer time scales – such as annual harvests or longer for crops such as coffee, fruit trees, timber and so on.

Our financialised food system is also more sensitive to financial crisis. As we have seen since 2008. Crisis exerts terrible pressures on both farmers and consumers. On one side we have seen increased bankruptcies and suicides among farmers. And, on the other side, increasing hunger, especially in towns and cities with record numbers using food banks.

The indicator

Derivatives are financial instruments between two parties that reference the price of something else: As the price moves, one party must pay the other. They have long been associated with agricultural produce but recently derivatives on the price of land and agricultural produce have been growing (growing… geddit?).

In economics textbooks, derivatives are sometimes portrayed as being useful for farmers to insure themselves against changes in the price of their produce. But this is very misleading. For most farmers, especially smaller farmers, derivatives are useless. Firstly, the minimum size of the derivative contract is usually much too big for an individual farmer. Secondly, derivative contracts do not insure a particular crop of a particular farmer. Instead, they trade on the price of standard quantities of standard quality of produce. If the farmer’s produce doesn’t match the standard quality specified in the derivative, she will not be able to use the derivative she has bought. In fact, most farmers fix prices in advance with wholesalers and supermarkets.

In the journey from farm to plate, the most likely users of derivatives are the gigantic multinational middlemen that dominate the food industry (such as Nestle), who deal in such large contracts that standard sizes of standard quantities are not a problem.

But the majority of food derivatives these days take on a more financial nature. One way of gauging this is by seeing how many derivatives contracts are “cash-settled”. In theory, some derivative contracts can be closed out by exchanging money for an underlying produce such as a ton of grain – known as ‘physical settlement’. But the vast majority are settled with a single cash payment between the parties to the derivative contract – ‘cash settlement’. Cash settlement is a great way for investors to use agriculture as an asset class. It saves them the bother of buying actual sacks of grain or other agricultural produce. The FAO has stated that only 2% of futures contracts end in physical delivery – the rest are settled with cash payments only. Assuming that a similar percentage applies to agricultural derivatives, then 98% of this enormous market does not actually involve any ‘real’ trade in the underlying agricultural produce.

What should we change?

The bigger picture is that we should not be letting finance decide how we feed ourselves. Agriculture is a key social and environmental battle ground. We need to give all people a healthy and affordable supply of food and eliminate the destructive agriculture we currently practice. This requires a rapid move towards methods such as agroforestry, permaculture and no-plough/no-dig farming. Such methods work with nature, value biodiversity and rebuild soil, they build carbon sinks in the process, all the while providing a more varied and healthy diet. And yes, Europe could feed itself using such methods – as a new report shows. To make this shift, we will need to restrict the role of private finance in agriculture. We should impose more democratic ways of allocating funds, instead of only focussing on that which provides the best short term financial returns.

More narrowly, looking at agricultural derivatives, we must undo some of the de-regulation of the last 30 years. We know it is possible to have strict controls on who can trade food derivatives and how they are traded- because that’s how it used to be. It is time to reinstate controls such as these on financial speculation in agriculture.

You can find more detailed policy ideas elsewhere on the Finance Watch website and on the Change Finance website.

Go to all Understand Finance