Analysis | Analysis of Capitalism - Rosalux International - Socio-ecological Transformation - Food Sovereignty Stop Playing With Our Food!

Because food speculation harms both consumers and producers, it must end

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Jan Urhahn,

Eingang zum Chicago Board of Trade, der globalen Leitbörse für Mais, Weizen und Hafer. Rechts und links vom Eingang steht eine Frauen-Statue, links mit Agrarwerkzeugen und rechts mit Weizenernte.
Die älteste Futures- und Optionsbörse der Welt, das Chicago Board of Trade (CBOT), ist die globale Leitbörse für Mais, Weizen und Hafer. CC BY-SA 2.0, Vernaccia, via Flickr

Food prices have soared to new heights in recent years — but is this development inevitable? For decades, the world market was largely defined by an oversupply of agricultural products and stable prices. However, since the beginning of the twenty-first century, a dramatic change has occurred: food prices are increasingly rising and fluctuating, culminating in the global food price crises of 2007–2008, 2011–2013, and 2020–2023. What role does food speculation play in this, and what does it mean for us?

Jan Urhahn heads the Rosa Luxemburg Foundation’s Food Sovereignty Programme in Johannesburg, South Africa.

Between February 2005 and February 2008, wheat prices rose by 181 percent. The World Bank estimates that this price explosion led to an additional 100 million people around the world suffering from hunger. Just a few years later, from 2019 to 2022, the UN Food and Agriculture Organization’s (FAO) food price index climbed from 98.1 to 144.7. In contrast to the 2007–2008 food crisis, however, global food production and stockpiles were sufficient in these years, even without products from Russia and Ukraine.

Nevertheless, the war in Ukraine led to a drastic increase in prices: within days of the onset of war, maize and wheat prices had risen by 50 percent. Particularly countries in Africa and West Asia, which are heavily dependent on grain imports from these two countries, were forced to switch to alternative sources of supply.

Meanwhile, interest rate hikes driven by inflation worsened the already heavy debt burden in the Global South. In 2023, the public external debt of low- and middle-income countries reached over 3 trillion US dollars — double the amount in 2010. Approximately 20 countries are now facing both a debt and food crisis at the same time. Moreover, fear of grain shortages also triggered speculative financial investments on the commodity futures markets (specialized exchanges for commodities), causing food prices to become increasingly decoupled from the balance between supply and demand — a development that in turn benefited financial speculators.

During the recent food price crisis, speculators invested remarkably large amounts of money. According to market studies, 4.5 billion US dollars flowed worldwide into funds that speculate in agricultural commodities in the first week of March 2022 alone — an amount typically seen over the course of an entire month. During the first four months of the same year, investors poured 1.2 billion euro into the two largest agricultural funds, the Teucrium wheat fund and the Invesco DB Agriculture Fund. By comparison, in the previous year, the figure was “only” 197 million US dollars spread over 12 months. Together, the two funds held wheat futures contracts — standardized agreements to buy or sell wheat at a fixed price in the future — amounting to more than half of the UK’s annual flour consumption.

Food Speculation on the Rise

Until the late 1990s, prices on the commodity futures markets were primarily determined by weather forecasts, the expected yield of a harvest, and the economic demand for oil. Commodity futures markets for food were originally created to enable farmers and traders to hedge against price risks by trading standardized contracts. However, from the outset, these markets primarily served the interests of large producers and major food corporations, rather than small and medium-sized enterprises. As a result, they have especially supported the industrial structures of the mass production and processing of food, which dominate in Europe and the United States.

Commodity markets underwent a radical transformation in the early 2000s. Following a global stock market boom that drove share prices to unprecedented heights, several speculative bubbles burst and the financial crisis of 2008–2009 descended, leading to a loss of confidence in traditional investments such as equities, government bonds, and real estate. In this context, the financial sector began to market commodities — including food — as a new investment opportunity. The investment bank Goldman Sachs had already laid the groundwork in 1991 with the Goldman Sachs Commodity Index, which tracks the development of the future prices of 25 commodities from aluminium to sugar. The introduction of commodity index funds allowed institutional investors (such as banks and insurance companies) to speculate in commodity prices for the first time.

This development was made possible by the progressive liberalization of the financial markets, including, for example, the abolition of capital controls, easing of bank regulations, and weakening of financial market supervision. The Commodity Futures Modernization Act, passed in the United States in 2000, marked a significant turning point for agricultural commodities, as it greatly facilitated the trading of commodity derivatives between financial institutions.

Although agricultural commodities are rarely traded directly on commodity futures markets, traders worldwide use the daily prices set on these markets as a benchmark for how they determine their prices.

Within a matter of only a few years, commodity markets underwent a fundamental transformation: for the first time in their 150-year history, commodity futures were no longer used exclusively for price discovery and risk hedging. Instead, the financial sector established them as an independent asset class that was intended to provide diversification and protection for asset portfolios in times of crisis.

With index funds in particular, banks have created an investment product whose value is tied to the performance of a specific commodity index. These indices generally reflect the price movements of futures contracts. Commodity index funds often comprise a mixture of different commodity groups, bundling foodstuffs such as wheat and maize together with commodities such as oil, metals, and minerals in a single portfolio. Investors bet on the assumption that commodity prices will rise overall in the long term, allowing them to profit from market price increases.

These funds are primarily managed and marketed by large investment banks. However, the often indiscriminate investment in the expectation of continuously rising prices frequently leads to speculative bubbles that can destabilize the markets.

Although index funds play a pivotal role, they are not solely responsible for the excessive speculation in food products. As market experts, hedge funds bet on rising or falling prices depending on the trend in order to generate short-term profits. They are also held partly responsible for the increasing correlation between currency, stock, and commodity markets. Another factor is high-frequency trading, in which computer-controlled systems buy and sell securities in fractions of a second, a practice that is characterized by short holding periods and high turnover and that can trigger extreme and rapid price movements or reinforce price trends.

The situation becomes particularly problematic when players are active on both commodity futures markets and the physical agricultural markets, as they can deliberately manipulate price trends in order to generate profits on both markets. For example, banks or grain traders can physically hoard commodities while simultaneously betting on rising prices on the stock exchanges. This is particularly problematic in the highly concentrated grain markets: five large agricultural groups — the so-called ABCCDs (Archer Daniels, Bunge, COFCO, Cargill, and Louis Dreyfus) — control between 70 and 90 percent of the global grain trade and therefore exert considerable influence on pricing.

Commodity Futures Markets and Real Markets

The prices negotiated on the commodity futures markets have a significant impact on food prices for consumers, producer prices for farmers, and commodity prices for processing companies such as mills, bakeries, and food manufacturers. Although agricultural commodities are rarely traded directly on commodity futures markets, traders worldwide use the daily prices set on these markets as a benchmark for how they determine their prices. For goods that can be stored and transported, such as grain or soy, a single leading exchange often determines the world market price.

While all continents are home to commodity futures markets, the most prominent agricultural exchanges are located in the United States and Europe. The first and to date most important of these is the Chicago Board of Trade (CBOT), which was founded in 1848 and is the leading global exchange for maize, wheat, and oats. In Europe, the MATIF exchange in Paris plays an important role in trading wheat and maize, although its futures curves generally follow the prices set by the CBOT.

Today’s agricultural markets are globally interconnected, and price developments in different regions of the world are closely interconnected. International trade prices for certain food products are based on prices on the commodity futures markets. Global price movements are also directly reflected in national food prices.

Many countries in the Global South are now heavily dependent on food imports — a consequence of the long-standing strategy promoted by institutions like the World Bank and the International Monetary Fund of focusing on the global market while neglecting initiatives that promote self-sufficiency. For instance, in 2018, around 85 percent of all food in Africa was imported. The poor populations of these countries in particular tend to be left at the mercy of price fluctuations and price spikes. While in Germany, an average of around ten percent of an individual’s income is spent on food, families in poorer countries must allocate up to 80 percent of their budget for groceries.

Actors that have no direct link to the agricultural sector should be prohibited from trading on the commodity futures markets.

Rising food prices have serious consequences in these nations: in countries with low purchasing power and a high dependence on imports, even minor price increases can swiftly lead to food insecurity. For many people, food simply becomes unaffordable, or they are forced to reallocate their low income in such a way that spending on essentials like healthcare or education is greatly reduced. But even in Germany, around 17 million people find themselves at risk of poverty. Those with a low socio-economic status are particularly affected by rising living costs and are no longer able to afford a balanced and healthy diet. According to estimates from the Federal Centre for Nutrition, approximately 3 million people are currently affected by material food poverty.

The high price volatility of food is devastating not only for consumers, but also for producers. Stable and predictable prices in the long term are essential to enable farmers to plan their production and secure their livelihoods. However, for medium-sized and smaller producers, severe price fluctuations make any investment a risk: if prices fall drastically at harvest time, farmers often cannot service their loans. This not only threatens their economic existence but also reinforces structural precarity and inequalities in agriculture.

Ending Speculation in Food Products

Numerous factors influence food prices, but speculation plays a major role in price spikes and fluctuations. These fluctuations allow speculators to generate profits but can have devastating effects for poor people and producers. To prevent these negative consequences, speculation in food factors that influence food commodities must be brought to an end. An important step in this direction would involve tightening position limits on commodity futures markets — that is, the amount of futures contracts that a trader or investor is allowed to hold or trade at any given time. This would prevent high market concentration and counter excessive speculation.

There is a high likelihood that a significant proportion of the disruption in price formation and high price volatility is linked to index funds, and it is for this reason that they should be banned. Furthermore, certain actors that have no direct link to the agricultural sector, such as insurance companies, pension funds, or pure investment funds, should be prohibited from trading on the commodity futures markets. Furthermore, greater transparency is needed in trading agricultural commodities in order to limit the information advantages of the five leading agricultural trading groups. These companies should also be subject to the same kind of regulation that applies to banks.

It is also important that alternative hedging instruments are developed that enable farmers and other actors in the food system to hedge against price fluctuations independent of the commodity futures markets. One opportunity for this is to create cooperatives in which farmers join together to hedge each other against price risks. Another option would be long-term contracts between producers and traders in which products are purchased at fixed prices. This would provide both parties with a high degree of planning security. In addition, government-mandated price corridors could be created for certain food items, making futures trading unnecessary for hedging prices.

There are plenty of proposals for putting an end to speculation in food commodities — now it is a matter of implementing them.

This article first appeared in nd.Aktuell in collaboration with the Rosa Luxemburg Foundation. Translated by Diego Otero and Louise Pain for Gegensatz Translation Collective.