Brian Gardner's Blog

Speculators and speculation were generally regarded as one of the dark forces driving up prices during the recent ‘food price crisis’. According to some consumer and farm groups, speculation, especially by index traders, was responsible for making an already bad situation worse. As drought and depleted stocks drove up the world market in the 2006-08 period, according to this view, the speculators moved in to make quick profits on the escalating prices and made an already bad situation for consumers and the world’s hungry even more critical.

Not so, say many leading economists. In fact, it is more likely that speculation helped to keep prices lower than they might have been by improving market stability. A recent report from the Organisation for Economic Cooperation and Development (OECD) says that there is ‘no convincing evidence that positions held by index traders or swap dealers impact market returns’. The relatively new index trading in agricultural commodities, the report found, did not generate increased price volatility, implied or realised.

Most of the rise in grain and oilseed prices in the 2006-08 period was caused not by speculation, nor by increased biofuel demand, but by the underlying fundamentals of the agricultural commodity markets. Prices rose sharply because harvests fell and rising demand depleted stocks which were already low.

The facts are, that as the OECD has confirmed, speculation in providing liquidity to international agricultural futures and options markets, facilitates price discovery and transparency and the management of price risk by agricultural producers and food processors. This makes it easier for producers to judge price trends in advance of planting and thus to invest in production with greater confidence.

Both the OECD and the UN Food and Agriculture Organisation (FAO) warn legislators against taking restrictive action against speculation. A recent FAO Briefing says that intervention to curtail prices could divert speculators from trading and thereby make less money available for the hedging which is vital part of the modern food commodity market system.

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