Commodity regulation
January 11, 2012
The Berlin-based group World Economy, Ecology and Development (Weed) along with other campaigners is lobbying for better rules against financial speculation on food. Deutsche Welle spoke with Weed's Markus Henn about the causes of recent food price hikes and how additional regulation could improve the situation.
Deutsche Welle: How high are food prices currently, and what does that mean for people in poor countries?
Markus Henn: Currently, prices are high again. There has been an increase again since the slump in 2008 and 2009. However, it is not uniform across all commodities. For example, rice has not peaked as was the case in 2008. But for wheat we hit a new record a few months ago. At the moment the prices are going down a little bit, but it is still, in general, the commodity with a price peak that is the highest on record.
You have campaigned against speculation in food commodities. Weed has started a petition to influence the proposed reform of finance instruments in the European Union. What is the goal of the petition?
The directive covers, amongst other things, the so-called commodity derivatives, which are contracts with which you can speculate on food prices and this directive is now dealing with commodity. At the moment, we think that these derivatives are not sufficiently regulated. We are trying to improve the regulation and influence the process.
Would it help if the derivatives were more regulated?
It would help because if you regulate the commodities derivatives. For example, if you have rules that financial speculators cannot take as many contracts or as high of a position as they wish, you can prevent at least part of the bubble which is taking place in the commodity markets at the moment.
In 2008, for example, we of course had some price reasons which were fundamental - a weak harvest. It was not just speculation but the speculation increased difficulties more than if there had not been speculation. If you regulate these markets as derivative markets then speculators cannot exacerbate these price peaks.
How much resistance is there against regulating markets in the way that you propose?
There's a lot. It mainly comes from the financial industry, which makes a lot of money with commodity speculation. Partly by themselves so they speculate on their own account, but also by channeling a lot money from investors and ordinary people into a so-called commodity product. The banks advertise funds that allow people to invest in commodities. This means that the banks buy these commodity derivatives and drive up the prices or strengthen the volatility of the prices and so the main defendant of deregulation is the financial sector.
Why should there be special regulations in place for the food market? Should it have a special status?
I think the food market should definitely have special status. We have seen in the financial crisis what financial speculation and deliberalization of financial markets means and also what catastrophic consequences it could have and I think we should not allow the financial markets to determine our food prices and our food production.
Of course agriculture needs finance and investment. But this kind of speculation is not investment in agriculture. It just brings more money to people who already have money and is not useful to agriculture as a whole. That is why we should try to limit the influence of financial markets on the food markets.
Some economists say food speculation is not the only reason why prices are increasing again. There have also been a lot of natural disasters, climate change, weak harvests, biofuel production. What is the role of financial speculation in food prices in comparison to other factors?
It's very difficult to give an exact number or the percentage of the influence. Some economists have tried that and come to the conclusion that 15 percent is due to speculation others looked at oils and came to 25 percent, some say even it's responsible for the majority of the price increase.
It is more useful to say that speculation is a major reason which does not mean that there are no other reasons. In 2008, there were reasons regarding the harvest. Last year, even though there were some droughts, the markets were not as tight as in 2008. There was still a good harvest. I think especially the wheat price rise is not justified by the fundamentals.
We think that the index investment speculation which is the main money from speculation is a key reason for the price spike and there are other academic studies from the last one to two years that also support this argument.
How likely do you think is it that we will learn lessons from the last financial crisis before the next crash? Can the system become more just and inclusive?
It's already improving a little bit, I think. We had some improvement regarding the financial market regulation, which are, of course, not sufficient, but which are progress. But I think we can hope that politicians will tackle the financial markets more and fight against speculation and unsustainable financial products.
Interview: Anke Rasper
Editor: Sean Sinico