During the beginnings of the Great Recession in 2008 and the years that followed, food prices went haywire. Indexes of food prices skyrocketed and took years to reach levels that even resembled normalcy. According to the United Nations, the crisis caused more problems with food security for the poor and drove even more people into poverty as food prices became a higher burden to bear. At least 130 million people were pushed into poverty in 2008 as a result of the food crisis and high pricing.

The idea of speculating what the future might hold in order to make some money is not new. In fact, the method has been used in virtually every market, with the exception of planned economies. Speculation by buyers and sellers in the market is actually helpful for reducing price volatility in markets for things such as food, as buyers and sellers can bet against price increases or decreases as a form of insurance against volatility.

However, problems can arise when non-commercial speculators enter the scene. These entities are generally financial institutions or investors. Excessive non-commercial speculation is bad for the health of the market because what is essentially calculated gambling on assets can actually end up increasing price volatility in the market, an issue that then causes people to become uncertain about the future.

Large amounts of uncertainty are not good for market coordination. In April and March of 2008, soybean and corn price volatility was upwards of 30% for each commodity (60% for wheat in March of the same year). These absurd outcomes have been largely attributed to the role of non-commercial speculators in the market. Other speculative tools such as commodity index funds, which use algorithms based on various different financial indicators to decide how to “bet,” facilitate even more speculative problems.

These speculative problems have caused the massive disruption of food supply chains and pricing. In 2014 the European Commission began to implement new regulations on securities markets (where commodities speculation takes place via “futures” and “options”). The new regulations were made to help avoid both the catastrophes of the 2008 financial crisis and the cascading problems that came with them, such as the food pricing speculation that drove millions into greater deprivation and the lack of reliable access to food at costs decided by market forces. These reforms were a step forward, and one of the first times serious measures had been introduced.

Although these concepts may seem quite far removed from the impoverished around the globe, financial markets can, and do, have reverberating effects around the global economy. In conjunction with the financial crisis, food speculation took a toll on those most in need and led to increased hardship across the board. However, as the European Commission demonstrated, measures can be taken to reduce the risks of excessive non-commercial speculation in markets. Responsibly done, commercial speculation can be a tool for increased market efficiency and stability. Without regulations in place, securities and commodities markets can become more sinister.

The Guardian cites figures estimating that large financial institutions including JP Morgan, Goldman Sachs, Morgan Stanley and others made billions of dollars off non-commercial speculation in food commodities between the years of 2010 and 2012.

– Martin Yim

Sources: Institute for Agriculture and Trade Policy, United Nations, Reuters, The Guardian
Photo: The Ecologist