Despite widespread suspicion, there is no clear evidence that the recent increase in speculator investment in agricultural futures markets has had a direct impact on rising food prices, says the Conference Board of Canada.
But the Ottawa-based think-tank also suggested in a recent report that the conclusion does not mean speculative cash is a totally benign force.
It said the injection of billions of dollars of non-agricultural money into futures markets has disrupted the traditional price discovery function of those markets and made them a less reliable hedging option for farmers.
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The board did not rule out eventually finding a link between food prices and the futures market speculation by professionally managed non-agricultural pools of money (referred to in the report as securitization).
“Additional empirical evidence may become available in future to shed greater light on the positive and negative impacts of securitization,” said the conference board report.
In Washington, the International Food Policy Research Institute reached a similar conclusion, although it called for stronger regulation of futures markets.
“Whether speculation is primarily a cause or a symptom of rising food prices and commodities market dysfunction is unclear,” it said in a July report. “The more crucial question about the effects of speculation on food markets is whether prices are telling the truth about supply and demand. Are producers, investors and policy makers receiving the right signals to guide their actions? If they are not and an agricultural bubble is underway, the consequences could be severe for farmers and consumers around the world.”
At the Guelph, Ont.-based George Morris Centre, senior research fellow Larry Martin said supply and demand fundamentals remain the defining reason for price shifts.
“I think it works both ways and in the end balances out,” he said. “Speculators buy in when prices are rising and that may affect prices. When prices start to fall, they pull out and that accelerates the process. In the long run, I don’t think it has a heck of a lot of effect.”
In a statement released with its report, conference board president Anne Golden said speculative investment has been a factor in non-food markets for years and is attracted to agriculture when the industry becomes unsettled.
“The spread of securitization of food commodities can be seen as an effect rather than a cause of the rise in world food prices,” she said. “Only when prices for underlying commodities are volatile does it become worthwhile for speculators and investors to seek profit in betting on price changes.”
The board said estimates put the amount of speculative futures trading investment at $260 billion US in March 2008 compared to $13 billion five years ago.
During that period, world food prices more than doubled after years of little change. It said this led to speculation that the two are linked.
The board said food price increases are more logically attributed to rising demand, stagnant production, crop disasters because of weather, biofuel demand for grain and government policies that limit production but encourage stockpiling of food in fear of future shortages.
However, it did concede that the influx of speculative money has disrupted the ability of farmers to use future markets as a hedge against falling prices.
“Hedging activity may become more complex if the futures market is driven less by agricultural fundamentals of supply and demand and more by the speculative activity of uninformed non-commercial investors,” it said.
Still, the conference board urged governments to be careful when trying to fix the problems speculation is creating.
