The Dangers of Agricultural Speculation: 'Price Increases Are Costing Millions of People their Health'
Financial speculators have discovered agricultural commodities, and the result has been skyrocketing prices for wheat, barley and other grains. SPIEGEL spoke with agricultural economist Joachim von Braun about how to curb such speculation and the dangers for the world's poor.
SPIEGEL: Professor von Braun, wheat is now 40 percent more expensive than it was in early July, and the price of barley jumped by almost 20 percent in only one week. Do you think prices will continue to skyrocket?
Braun: In general, we have to be prepared to see prices rise -- and fluctuate heavily at the same time. The situation is very precarious at the moment.
SPIEGEL: Is it already as serious as it was in 2008, when prices shot up resulting in food riots around the world?
Braun: The structural problems remain unresolved. Climate change is advancing. The fires in Russia and the flooding in Pakistan are warning signs. The world's population is growing, land and water are becoming scarce, and people are eating more meat. All of this drives demand and limits supply. In addition, the events of 2008 have politicized global markets to a greater degree than in the past.
SPIEGEL: You are alluding to Russia, which recently imposed a ban on wheat exports.
Braun: The Russian decision has made the markets extremely nervous. The failure of markets in a crisis, as occurred in 2008, leads to a tremendous loss of confidence in global trade, and to hording and old-fashioned autarchy. This harms the poorest of the poor and benefits speculators.
SPIEGEL: How much of a role do you think financial speculators have played in the recent price increases?
Braun: It isn't a number that can be precisely expressed as a percentage. But the connection is obvious. Prices are no longer determined solely by real quantities of supply and demand. The speculative use of financial capital also drives up prices, and creates price spikes. None of this would be terribly serious if prices would simply continue to rise gradually. The unpredictable ups and downs are the problem, because they inhibit investment.
SPIEGEL: But it isn't as if the speculators just now appeared on the scene.
Braun: The development began back in 2004, in the wake of the deregulation of international financial markets. At the time, we began to see intermingling between financial markets and agricultural markets, two businesses that had had little in common until then. The result became obvious for the first time during the 2008 crisis. When the government of Vietnam announced that it was closing its rice market, prices shot up by 30 percent the next day. A precipitous increase like that can't be explained by any economic model that deals solely with conventional factors, like production, demand or inventory.
SPIEGEL: Ultimately, though, banks are the key players in the commodity futures markets, which would suggest that responsibility for the price volatility lies with them.
Braun: That's true, on the surface. But the banks are backed, for example, by pension and insurance funds, which have billions to invest. They take advantage of the fact that commodities prices and stock prices often move in opposite directions, enabling them to balance risk. This makes commodities appealing as a separate investment class.
SPIEGEL: Are you saying that someone who buys a life insurance policy is ultimately supporting speculation in wheat or cocoa?
Braun: That needs to be qualified. In a crisis like the current one, speculative behavior pervades the entire population. The millions of mothers who are now keeping 20 kilograms instead of 5 kilograms of rice in their pantries are also speculators, in a sense, because they are essentially stockpiling. Speculators involved in real grain trading fulfill an important function, because their activities signal to the market whether a given commodity is scarce and expensive or cheap and therefore available in abundance. The speculation driven by financial markets is different, because it has decoupled itself from the real market and is distorting prices.
SPIEGEL: From a moral standpoint, it's hardly justifiable to gamble on the scarcity of food products.
Braun: That is certainly a question we have to ask ourselves. If the prices reflect as much excessive speculation as we assume, the additional increase in prices is costing millions of people their health or even their lives, because they can simply no longer afford their staple foods.
SPIEGEL: What can be done to curb such speculation?
Braun: We have to establish a club of the key grain exporting countries. Its members should establish a reserve at the global level, a true world grain reserve, as well as a virtual granary.
SPIEGEL: What do you mean by that?
Braun: The virtual grain reserve could consist of a capital fund in the vicinity of $20 to 30 billion (about 15 to 24 billion), which could be used in crisis. For instances, when prices go haywire, this club would buy futures contracts on all the major exchanges, in Chicago, London and Paris. The money in this fund would be sufficient to buy about half of the wheat, rice and corn being traded internationally, products which are critical for poor people. In other words, the club would assume the role of a central bank for the world's grain.
SPIEGEL: That would be a substantial intervention in global markets.
Braun: We're talking about capping extreme price spikes in conformity with market conditions. This would probably be too much regulation for the Americans. Nevertheless, we need a global institution whose members can reliably help each other out with open grain trading during crises.
SPIEGEL: Are you saying that this sort of consortium would have been able to prevent the price hikes of recent weeks?
- Part 1: 'Price Increases Are Costing Millions of People their Health'
- Part 2: 'It Will All Come at the Cost of the Poorest of the Poor'
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