Photo Gallery: The Dangers of Speculation on Agricultural Commodities

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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?

'It Will All Come at the Cost of the Poorest of the Poor'

Braun: Absolutely, because Russia, for example, would not have imposed a ban on wheat exports, thereby triggering the wave of speculation. Instead, it would have been able to rely on other countries pitching in. India and China, for example, are sitting on huge surpluses. Their warehouses are full and, in some cases, inventories are rotting.

SPIEGEL: The concept of a selfless international grain club sounds naïve. Each country would surely take care of itself first.

Braun: An every-man-for-himself policy is inconsistent with a world in which hunger is a growing problem. Naturally, politicians in threshold countries are worried that higher food prices could trigger unrest, particularly now that people are much better informed than they used to be. That's the reason some of the inventories are so absurdly high. But this wouldn't be necessary if everyone participated in the world market.

SPIEGEL: It is difficult to imagine the prime ministers from India and China having much faith in such a central grain bank.

Braun: If the Indians or the Chinese are part of this bank, they'll do it. Indian Prime Minister Manmohan Singh was the first head of state with whom I discussed these issues, back in 2007. Later on, I also had the opportunity to touch on the subject briefly with his Chinese counterpart, Wen Jiabao. Both men are very interested in securing the food supply.

SPIEGEL: Even politicians in France and Italy were afraid that protests over rising food prices would break out in 2008. Many consumers in Germany are uneasy at the moment.

Braun: The concerns of German consumers are completely unfounded. The price of wheat, for example, is just a tiny part of the price of a breakfast roll. But the situation is different for the world's poorest three billion people. For them, the price of wheat or rice plays a huge role in their lives -- and survival. What we refer to as hunger, or a lack of sufficient calories, is only part of the deeper problem of silent hunger, which is triggered by malnutrition. This affects about two billion people. And the consequences are irreversible. Someone who is exposed to extreme hunger as a child will only achieve half of his productive potential throughout the rest of his life.

SPIEGEL: Is hunger just a problem of distribution? Or of real scarcity?

Braun: The shortage of healthy food products is real. By the middle of the century, the world's population will have grown from seven billion people today to nine billion, but with the eating habits of 12 billion: more meat, more milk and more eggs. And we mustn't forget that agriculture is producing more and more biomass for energy. The only way to ensure that we can feed the next generation and protect the environment is to invest more in global research into improving agricultural productivity. Arable land cannot be increased at will -- at most it will grow by 10 to 15 percent by mid-century. And water is also becoming increasingly scarce.

SPIEGEL: Speculators are most active in markets that are tight and confusing. The development of a global grain reserve will hardly be sufficient to rein them in.

Braun: That alone won't be enough, especially now that financial investors themselves are trying to buy warehousing capacity, wharfs and terminals. We desperately need appropriate regulation of the agricultural markets that would curb speculation.

SPIEGEL: How would that work?

Braun: Speculation needs to become more costly. In the future, financial players should be required to deposit capital for each transaction in the futures markets, so as to underscore a serious interest in trading. This will deter all those who merely intend to quickly jump in and out of the market to turn a profit.

SPIEGEL: But money is no object for a wealthy bank like Goldman Sachs.

Braun: Deposited capital, which would be payable for each traded contract, increases the costs of speculation because it ties up liquidity. It's similar to the minimum reserve rule we also have in the banking sector…

SPIEGEL: …and that would slow down trade, as it were.

Braun: Slowing things down, even if it were only for a few minutes, would benefit international commodities trading. But a more transparent market is also important. It has to become clear who is trading out of a genuine interest in the commodity and who is merely speculating for financial reasons. In addition, an independent clearinghouse should supervise trading in the future. It should monitor each transaction to make sure that financial institutions are clearly separating their deals. At the moment they are wildly juggling their financial products back and forth within their organizations, products like derivatives on bonds, real estate, loans, foreign currencies and agricultural commodities. These products should be traded separately, or else transparency will be completely lost.

SPIEGEL: It would make the most sense to ban speculation on food products altogether.

Braun: That would be an ill-advised step toward a planned economy. Besides, we need "good" speculation, that is, the signals that predict a real shortage, for example. It's a form of protection that enables us to quick react to a fragile supply situation.

SPIEGEL: And what happens if the agricultural commodity markets don't change in the way you describe?

Braun: Then the fatal development of recent years will repeat itself. There will be dramatic bottlenecks in developing countries. More and more countries will seal off access to their food production, and instead of good globalization we'll experience a return to costly autarchy, and it'll all come at the cost of the poorest of the poor. An undesirable development that the world cannot afford.

SPIEGEL: Professor von Braun, thank you for this interview.

Interview conducted by Susanne Amann and Alexander JungTranslated from the German by Christopher Sultan
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