Oxfam predicts food prices to double – Is speculation to blame?

3rd June 2011

Oxfam chief executive Barbara Stocking told reporters: "The food system is pretty well bust in the world. All the signs are that the number of people going hungry is going up."

Here is a link to a summary and the full report from the Oxfam website.

Among other things, the report notes increasing speculation around agriculture, but also the steps being taken by the EU and the US to bring speculation under control.

However what should investors do and is speculation really to blame?

The Guardian thinks so and has been reporting on the issue all week. Writing from Chicago, the birthplace of most financial instruments to deal with food, Felicity Lawrence brings this report.

A lot of the heat of the argument surrounds whether the US, reportedly on the urging of Goldman Sachs, was right to deregulate some commodities markets opening them to the wider investment community and whether it should reregulate them.

Lawrence outlines the two sides of the argument here.

For the defence, she talks to the Chicago Mercantile Exchange and quotes the head of product development, Fred Seamon, saying: "There is no credible evidence that suggests index funds or any group of traders are a cause for high prices or increased volatility. There may be a correlation, but that's a completely different thing."

She adds that CME argues that the volume of speculation is not a problem, because the overall composition of the agricultural commodities market has not changed; the increase in activity by index funds has been matched by an increase in trading by those who are commercial participants, i.e. those who have a direct interest in the physical goods.

Not all agree. Lawrence also quotes Mike Masters, a hedge fund manager, who wants to see regulation, from evidence he gave to Congress.

"When billions of dollars of capital is put to work in small markets like agricultural commodities, it inevitably increases volatility and amplifies prices – and if financial flows amplify prices of food stuffs and energy, it's not like real estate and stocks. When food prices double, people starve," Masters said.

Tough words indeed.

For a more technical take, the Financial Times journalist Gillian Tett considers the situation and gives a history of the debate to date here in an article for fund supermarket Funds Network.

And never, knowingly avoiding controversy, the Economist debates the motion "This House believes there is an upside for humanity in the rise of food prices".

Further reading.

Here is a thoughtful piece on the view, stateside, from the University of Texas at Austin, senior lecturer Sandy Leeds.

Last month, website Seeking Alpha included some very interesting graphs mapping the impact of food prices on inflation in a range of developing and emerging markets.

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