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BRICS, agricultural commodities, G20 and experiments with truth

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There’s a flurry of activity around the start of the G20 and the IMF-World Bank meetings. Some of this activity has to do with food and agriculture, and with the agricultural commodity markets and its ties to the financial markets. While the G20 has a lot to do with the growing strength of the BRICS bloc and the IMF, what stands out is a trenchant and insightful commentary by Unctad’s Trade and Development Report 2011 on the matter of agricultural commodities and the markets (exchanges rather) which control them.

Financial investment in commodities as a proportion of global oil production, 2001–2010. Chart: Unctad Trade and Development Report 2011

It has attracted the attention of Emerging Markets, a periodical (online too) which talked about food price and agricultural commodities markets with Joerg Mayer, senior economic affairs Officer at Unctad. Emerging Markets has quoted Mayer as having said that the risk management strategies promoted by the World Bank “only make sense if you assume that exchanges are working well for hedging purposes – and our research shows that, when large numbers of financial investors are present, they don’t work well“. Hear, hear.

Mayer said that the World Bank’s approach would also be logical “if you assume that financial investors have no impact on prices, or that their presence improves [pricing]”. Of course to make such an assumption is to agree with an untruth, for Unctad’s Trade and Development Report 2011 has said quite plainly that strong investment across agricultural commodities markets mean that they have “followed more the logic of financial markets than that of a typical goods market”.

The chapter ‘Financialized Commodity Markets: Recent Developments and Policy Issues’ from the report is worth reading closely and in full. Here is an indicative paragraph:

“The commodity price boom between 2002 and mid-2008 and the renewed price rise of many commodities since mid-2009 have coincided with major shifts in commodity market fundamentals. These shifts include rapid output growth and structural changes, both economic and social, in emerging-market economies, the increasing use of certain food crops in the production of biofuels and slower growth in the supply of agricultural commodities. However, these factors alone are insufficient to explain recent commodity price developments. Since commodity prices have moved largely in tandem across all major categories over the past decade, the question arises as to whether the very functioning of commodity markets has changed.”

Prices and net long financial positions, by trader category, selected commodities, June 2006–June 2011 (CIT = commodity index traders; PMPU = producers, merchants, processors, users). Chart: Unctad Trade and Development Report 2011

Unctad’s research on the subject has shown that investors are motivated by “factors totally unrelated to commodity market fundamentals”. This is as bald an assessment of the behaviour of investors as you can hope to see from an inter-governmental organisation (the World Bank and International Monetary Fund are incapable of stating truths like this one).

“Against this background, the French Presidency of the G-20 has made the issue of commodity price volatility a priority of the G-20 agenda for 2011, since excessive fluctuations in commodity prices undermine world growth and threaten the food security of populations around the world (G20-G8, 2011). These fluctuations are seen as being related to the functioning of financial markets and the regulation of commodity derivatives markets.”

Unctad’s Trade and Development Report 2011 has argued for tighter regulation of financial investors, including limits on the positions taken by individual market participants; a rule to prevent banks that have insider information about commercially based market sentiment undertaking hedging operations for clients; a similar rule to prevent physical traders betting on outcomes they are able to influence; and a transaction tax or a requirement to hold positions for a minimum amount of time.

Instead, the World Bank’s analysts have generally argued that price volatility is driven by fundamentals, such as input costs, which other economists have failed to include in their calculations. This is an argument that cannot stand up to the merest suggestion of an examination of the cost of cultivation for, while inputs do cost more from one year to another in high-input farming (in Asia and Africa and South America, even with smallholders who are held to ransom by industrial agriculture companies) these are not the “fundamentals” the Bank-IMF crowd insist are responsible. The trouble is, they won’t admit to any others. Worse, they have enfleshed this delusionary tack with the help of their old collaborators, such as JP Morgan, which now has a hedging business that works on agricultural commodities markets and this year joined the World Bank/International Finance Corporation to launch an Agricultural Price Risk Management Facility, “designed to fund small players to hedge more effectively” (nudge, nudge, wink, wink, etc).

Correlation between commodity and equity indexes, 1986–2011 (The data reflect one-year rolling correlations of returns on the respective indexes on a daily basis). Chart: Unctad Trade and Development Report 2011

Said the chapter ‘Financialized Commodity Markets: Recent Developments and Policy Issues’ from the Trade and Development Report, 2011:

“Indeed, a major new element in commodity markets over the past few years is the greater presence of financial investors, who consider commodity futures as an alternative to financial assets in their portfolio management decisions. While these market participants have no interest in the physical commodity, and do not trade on the basis of fundamental supply and demand relationships, they may hold – individually or as a group – very large positions in commodity markets, and can thereby exert considerable influence on the functioning of those markets. This financialization of commodity markets has accelerated significantly since about 2002–2004, as reflected in the rising volumes of financial investments in commodity derivatives markets – both at exchanges and over the counter (OTC).”

We think the G20 participants (finance ministers, central bank administrators and similarly high-powered persons) ought to have mentioned the matter. Instead, this is what they said.

“The BRICS countries, represent quite a big share of the global economy. In today’s crisis period, internal demand of each economy is important, and we should find a way to enlarge internal demand in our economy.” – China Central Bank chief Zhou Xiaochuan. “We represent a group of countries where there is (an) enormous amount of demand for resources at home for poverty reduction … so there is going to be big, big tension between giving money to a multilateral institution for the purpose of restoring global stability and meeting our own aspirations at home.” – Reserve Bank of India governor Duvvuri Subbarao.

“Enlarge internal demand” and “enormous amount of demand for resources at home”? Isn’t that exactly the sort of prognosis the World Bank, IMF and IFC will happily enlist as fundamentals of food prince index drivers? As for the rest of us, it’s back to promoting and practicing ecological economics.

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Three conclusions for agricultural commodities, says European Commission

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A Syrian family receives food aid at a WFP distribution point. Photo: WFP/John Wreford

A Syrian family receives food aid at a WFP distribution point. Photo: WFP/John Wreford

Here’s the latest punditry from the European Commission.

“Despite remaining uncertainties, based on the outlook for agricultural commodities established by several organisations, including the latest Commission medium term projections, three conclusions are clear for agricultural commodities:

  • Agricultural commodity prices  are expected to stay higher than their historical averages, reversing their long-term downward trend, at least for the foreseeable future.
  • Price volatility is also expected to remain high, although uncertainties with respect to its causes and duration persist.
  • The level of input prices used in agriculture is also likely to remain higher than its historical trends.”

These three conclusions are contained in the document, ‘Tackling the Challenges in Commodity Markets and on Raw Materials’, issued as a Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. (These Eurocrats need urgent lessons in how to be brief and clear.)

The ‘Communication’ has also said:

“While higher global prices could stimulate  agricultural production, price transmission mechanisms are often imperfect. In many developing countries, commodity markets are often disconnected from world markets or, at best, world price signals are transmitted to domestic markets with considerable lags so that a domestic supply response is often delayed. Several analyses by the Food and Agricultural Organisation, OECD, Commission and others have focused on supply and demand developments, exacerbated by short-term economic and policy factors (including restrictions on exports) that explain part of the observed extreme price volatility, including factors specific to financial markets that may have amplified price changes.”

A food crisis in northern Burundi’s Kirundo province – the result of failed rains – has prompted many women to make a long daily commute to neighbouring Rwanda, where a day’s work in a field earns them just enough money to feed their family for a day. Photo: IRIN/Judith Basutama

A food crisis in northern Burundi’s Kirundo province – the result of failed rains – has prompted many women to make a long daily commute to neighbouring Rwanda, where a day’s work in a field earns them just enough money to feed their family for a day. Photo: IRIN/Judith Basutama

There are several errors in this statement. One, in many developing countries, commodity markets are extremely closely tied to world markets quite simply because they are buying staple foodgrain from world markets. Two, domestic supply responses are not delayed – the structural adjustment in agriculture is preventing them from taking place. Three, the “restrictions on exports” mantra is being repeated as often as possible by all multilateral development banks (World Bank, IMF, ADB, IADB, AfDB) and by financial markets and commodities analysts who collaborate to spread this misinformation. Four, why are the “factors specific to financial markets” not spelt out?

“The combination of the above factors implies that higher prices for agricultural commodities will not necessarily result in higher incomes for farmers, especially if their margins are squeezed by increased costs. In addition, potential problems for net food importing countries and more generally for the most vulnerable  consumers are evident, stemming from price impacts on food inflation. While a certain degree  of variability is an intrinsic part of agricultural markets, excessive volatility does not benefit producers neither users.”

The contradictions between what the EU thinks it ought to say to the finance + markets constituency and what it thinks it ought to say to critics of neo-lineral economics at home is clear from this paragraph. The EU is admitting there is a profiterring taking place between the higher prices for agri commodities and the “not necessarily” higher incomes for farmers. Higher costs are mentioned too. Food importing countries have “potential problems’! (Seriously, are the people who wrote this completely unaware of the events in North Africa and the reasons behind them?)

What use is the Committee on World Food Security?

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The Committee on World Food Security (CFS) opened its 36th session yesterday (11 October 2010). It’s described as “a five-day high-level intergovernmental meeting” which “takes place against a background of recent increases in international food prices which pose additional  challenges to food security”.

The FAO (Food and Agriculture Organization of the United Nations) said the Committee aims to be “the most inclusive international and intergovernmental platform for all relevant stakeholders to work together to ensure food security and nutrition for all. In its role as the cornerstone of the global governance of agriculture and food security, the CFS will be more effective in facing challenges to food security”.

I expected that now at least, when the price of food staples is rising the way it did in 2007, the FAO and its constellation of agencies and committees and task forces would quit moralising and get down to naming names and naming reasons for the rise in prices. After all, the FAO food price index is relied on by national governments, traders and commodity markets – all for different reasons of course. It’s absurd to imagine that FAO analysts cannot see the reason why those indices move.

But if you read FAO statements and press releases, it sounds as though the problems they are struggling to describe in real terms have nothing whatsoever to do with things like trade, speculative trading, hoarding, price gounging, dumping, trade rules, tariffs, embargoes and other instruments designed to beggar national neighbours and reinforce trading blocs.

The FAO still refuses to say that market forces – call it what you will, free market forces or speculative trade or consumerist economics – is very largely responsible for food shortages and food price spikes all over the world. If this 36th session of the Committee on World Food Security cannot, will not or dare not speak the truth, it may as well pack up and go home and save some money by disbanding.

As for the statements, sorry but we’ve heard it all before in varying shades of myopic optimism:

1) FAO Director-General Jacques Diouf said “Global problems demand global as well as local solutions. The renewed CFS constitutes the required platform for debating global complex problems and reaching consensus on solutions.”

2) “This week marks the launch of a strategically coordinated global effort to draw on the combined strengths of all stakeholders engaged in the fight against global hunger,” said World Food Programme  (WFP) Executive Director Josette Sheeran.

3) International Fund for Agricultural Development (IFAD) vice-resident Yukiko Omura said: “Investing in small farmers — improving their access to land, to appropriate technology, to financial services and markets, and responding to their other requirements — is the most effective way to generate a broad-based movement out of poverty and hunger.”

Messers Diouf, Sheeran and Omura, set aside your prepared statements and summon up the courage to tell the countries which support the FAO the truth about global food prices. Tell them about the World Trade Organisation (WTO) and free trade agreements and the conditions attached to development aid. Help your agencies do their work by being honest about the problem.