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As food speculators make money, the world's poorest suffer

By Deborah Doane, Special to CNN
  • Deborah Doane: It's the poor who pay the biggest cost when food prices rise
  • The World Bank estimates 40 million have been pushed into poverty due to rising food prices
  • It is estimated Barclays Bank made £340 million in 2010 from food speculation activities
  • Doane: Price volatility helps no-one other than a few wealthy investors

Editor's note: Deborah Doane is director of the World Development Movement, a leading anti-poverty campaigning organization. For the past 15 years, she has worked with NGOs, think-tanks and the private sector on ethical trading, human rights and sustainable development issues, most recently as head of sustainable consumption at WWF-UK.

(CNN) -- When food prices rise, it's the poor who pay the biggest cost.

Speculation by banks and hedge funds on the future price of food translates into real and extreme price hikes on the ground. Higher food prices mean that the most deprived people go hungry and reduce their spending on essentials including education or healthcare -- so a short-term crisis in food prices leads to longer-term deprivation.

There is strong evidence that higher food prices in 2007 and 2008 led to over 100 million more people going hungry at the time, while the World Bank has estimated that a further 40 million have been pushed into poverty and hunger since June 2010 as a result of rising food prices.

With many people having to pay 60, 70 or even 90% of their income on food alone, it's no wonder revolutions are triggered.

For a few brief moments in May we thought the bubble had finally burst -- commodity futures prices fell 5% in one day of trading early in the month. But even before the brief respite from the heat of the markets, investors made millions in driving up the self-fulfilling bubble in the first place.

With many people having to pay 60, 70 or even 90% of their income on food alone, it's no wonder revolutions are triggered.
--Deborah Doane, director of the World Development Movement

The World Development Movement estimated recently that Barclays Bank, the UK's largest commodity trader, made as much as £340 million in profit in 2010 from its food speculation activities. When challenged, Barclays argues that they're just a broker in the deal, nothing more.

Of course, they're not the only culprit. Glencore, the world's largest commodity trader, which recently floated on the London Stock Exchange and become the first company to parachute into the FTSE100 from the outset, has also been accused of manipulating markets through speculative activity.

Rising prices is a good thing, we hear. It sends price signals to the market to ensure growing investment in agriculture to feed a growing population. If only this were so. Price volatility helps no-one other than a few wealthy investors.

And when prices fall rapidly, as they did briefly in May, pity the farmer who has no idea which price "signal" to follow. Is it up? Or is it down? They may choose to hoard their stocks, awaiting price rises, only to find out that prices fall; or they may choose to sell, having lost out on thousands.

Worse, they may choose to go into debt, buy up new land for investment, only to find that there isn't sufficient new demand in the long run, in a year with better weather, or as investors have moved off onto the next asset bubble. When speaking to a large arable farmer in the UK, recently, I was told that he certainly wouldn't risk buying more land for production, as it simply is too risky a venture. In the end, he agreed, producers take all the risk and see few, if any, of the benefits.

James Quinn, writing in UK newspaper The Daily Telegraph, suggests that the present volatility has likely been fueled by a herd instinct amongst investors.

"Commodity markets have a tendency to cascade because speculators are positioned simultaneously, creating a rush for the exit," Quinn quotes an investor as saying.

It hasn't always been this way. Food commodity markets were regulated and therefore relatively stable from the Great Depression to the late 1990s. At the time, the majority of trade came from commercial traders.

With the opening up of the financial industry over the last decade, the bulk of trading activity in commodities now comes from financial traders. According to Mike Masters, a U.S. hedge fund manager, "Speculators today have about 70 percent of the open interest in commodity markets. Ten years ago, they controlled roughly 30 percent of the market." Unlike commercial traders, their interests are to make a quick buck -- for their clients, and for their pay packets, one presumes, not about long-term investment in agriculture.

Politicians won't have a moment's relief, as they watch the prices rise almost daily, adding to excessive and uncontainable inflation. They simply can't afford to take their eye off the ball, and wait for the market to "correct" itself. It certainly won't any time soon, as volatility now seems to be the order of the day.

Proposals under discussion in Europe, headed by the Internal Commissioner Michel Barnier, and modeled after legislation adopted by the U.S. last year to establish greater transparency and set limits on speculative trading, are still being hotly contested in Brussels and within the UK government. Yet the Markets in Financial Instruments Directive (MIFID) set to be published in the autumn, offers one of the best hopes to curb speculation and return these markets to a reasonable state of functioning -- where the market can generally respond to the realities of supply and demand on the ground.

At a time when the resolve of governments to crack down on casino behavior in financial markets is already under intense public scrutiny, it's more important than ever that our politicians put the interests of the millions of vulnerable people for whom food itself has now become a luxury over those of a handful of super-rich speculators.

The opinions in this commentary are solely those of Deborah Doane.

In response, Glencore says: Glencore is an integrated commodity producer and marketer. We mine and farm commodities in more than 30 countries worldwide, increasing global supply. On the marketing side we are engaged in physically moving commodities around the world, ensuring they reach the customers that need them in the most efficient way possible. The vast majority of our derivative use is to hedge price risk rather than to take price risk.

Barclays Bank declined comment.