Bärbel Dieckmann, Welthungerhilfe
Dr. Thilo Bode, foodwatch
Dr. Sabine Miltner, Deutsche Bank

Food – a pawn in the hands of speculators?

Dialogue forum on 13 May 2014

Nearly a billion people around the world are starving. Hundreds of thousands of children suffer from malnutrition. Even a temporary rise in food prices can seriously worsen the living conditions of these people, and cause death by starvation. On the last evening of the Dialogue Forum 2014, the podium guests endeavoured to clarify to what extent speculation influences food prices and how excesses in this speculation can be curbed. Invited to the discussion were Bärbel Dieckmann, President of the German aid agency Deutsche Welthungerhilfe, Dr. Sabine Miltner, Group Sustainability Officer at Deutsche Bank, and Dr. Thilo Bode, Managing Director of foodwatch.

Hunger has many causes. These include a growing global population, crop failures, political events and poverty. "Many people in the developing nations spend 70 to 80 percent of their income on food. In the industrialised nations that figure is only 10 to 20 percent," Bode explained. Minimal price increases can mean that people in poorer countries can no longer afford enough food."So even temporary increases are dangerous," the Managing Director of the consumer association foodwatch warned. Even if the academic sector isn't of one opinion, there are sufficient reasons to conclude that speculation with agricultural commodities such as wheat, maize or soya can drive prices upward in certain situations.

Rapid increase in speculation
Once conceived as a tool for producers and buyers of agricultural products to hedge against price fluctuations, increasing numbers of investors have been discovering the commodities futures market as a lucrative investment in recent years. "In the past, the share of speculators on the market was around 30 percent, but since the deregulation of the market at the turn of the millennium, that share has increased to around 80 percent," explained Bode. And furthermore, the financial crisis has flushed a lot of money into the commodities markets. The trading volume has increased from around 13 billion to 600 billion dollars.

That can cause problems: If a large number of investors bet on supply shortages after bad harvests or political events, this can trigger off a spiral that drives the prices on the futures market upward. And although the commodities futures market only reflects price expectations, it has a signalling function for the commodity prices. "The transmission mechanism, i.e. the influence of the commodity futures exchange on the physical market, is not conclusively proven in scientific terms," Bode said. "But developing countries that are net importers of agricultural goods are hardest hit."

"The fact that a large share of researchers in this field consider financial bets to be responsible for price peaks in certain crisis situations is enough to restrict the speculation," Dieckmann agreed. She pleaded in favour of more transparency on commodities exchanges and a ban on investment funds that speculate with agricultural products. Sabine Miltner, who is in charge of sustainability issues at Deutsche Bank, saw things differently: "The studies are not conclusive. The situation is very complex." In her opinion the discussion is going in the wrong direction. She thinks the topic of investment in the agricultural sector is much more important. It can be used, she said, to stimulate the production of agricultural products, thus doing something to counteract hunger in a lasting way. "80 billion dollars are required every year in order to adequately feed the growing global population," she explained. She said that the most important price drivers in the agricultural sector were droughts caused by climate change and political interventionism such as the export ban that Russia imposed on wheat in 2010. The transactions like those entered into by Deutsche Bank were detached from the physical goods, she maintained.

Large investors like commodity funds
For regulatory reasons, she continued, Deutsche Bank has already largely withdrawn from trading with commodities."The business was no longer profitable for us." But what they do still have in their portfolio are index products. They map the value changes in commodities on the futures market and are appreciated by large investors such as pension and hedge funds as a means of spreading risk. But the index funds themselves do not contain commodities, only financial futures contracts. "The funds are structured in such a way that they have a stabilising influence on the prices," Miltner explained. Contrastingly, she said, Deutsche Bank has liquidated another fund, because there was the chance that it was intensifying price peaks. "To this day we are of the opinion that this was the right thing to do," the bank expert continued, also adding that they were more than capable of responding when the state of knowledge changes.

"I am aware that Deutsche Bank is not responsible for the speculations on its own with its index funds; there are also other players on the market that have an even bigger influence," Dieckmann admitted. But she said that every entity involved should use its influence to prevent certain negative developments. "The fact that other banks earn even more with these transactions cannot be the argumentation," she said. And Bode worded his response even more clearly: "Even if an individual bank doesn't have a major influence on its own, how responsibly a major financial institution behaves does matter." He said that a number of banks have already led by example and withdrawn from food speculation. And even if the opinions of the academics vary on the topic of speculation, the financial industry has the obligation to be proactive in cases of doubt: If there is justified reason to believe that a certain act may be dangerous to life and body, it has to be stopped. Instead, the financial lobby is putting on the pressure to have restrictions prevented. "Stop speculating and stop trying to hinder the required controls," Bode appealed.

Banks impede regulation
Miltner countered: "I don't believe that if I close our index fund tomorrow that as much as one starving child will be better off." She drew reference to the United Nations' Principles of Responsible Investment, which Deutsche Bank adheres to, and continued by saying that if you start restricting markets, more or less at random, you have to consider what undesired consequences that might give rise to. "It isn't about restricting markets more or less at random," Bode retaliated. He said that negotiations about the financial markets directive in Europe were struggling to come up with measures for curbing the excessive speculation in certain phases, but that the banks were torpedoing the plans with the argument that it would then no longer be possible to offer the customers individually tailored products."What kind of a justification is that?" the foodwatch boss protested, appalled. "It's not about customers," he said, "it's about fighting hunger!"

By the end of the evening it was obvious: the topic is complex and the advocates and opponents of food speculation will continue to debate heatedly in the future. Price peaks in crisis situations have to be prevented, as otherwise food becomes too expensive for many people. It is undeniable that the political sector is trying to introduce more efficient regulations, but we can only conquer hunger in the world if more money is invested into a functional agricultural industry.

CB, 20 May 2014