Resources Research

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Posts Tagged ‘derivatives

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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How the G20 ministers said ‘agriculture’ but meant ‘trade and commodities’

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Under the presidency of France, the G20 called a meeting of its member countries’ agriculture ministers to consider the food production and food price problems. They have releaed a “ministerial declaration”. This declaration is being called a “renewed commitment” to tackling hunger by part of the financial media, or is being called “weak” and a mere restating of positions by the more critical, or is being called an empty document full of vague promises and no reform by some activists.

Sandatu Kalug, 58, a lifetime rice farmer in Maguindanao Province lost his entire paddy crop to heavy flooding in June 2011. Photo: David Swanson/IRIN

In fact, it is a strong statement alright. It supports the current model of agri-business, of international investment in arable land, it supports the operations of the global agriculture commodity markets and trading systems, and it ensures that the flows of finance and capital between the world’s financial markets and the commodity markets will continue with less restrictions rather than more control.

All this is done in the name of small farmers and poor consumers. They have talked about a new global agriculture market information system (Amis) so that governments can share better data about the state of food stocks and global production. This is nonsense – it is the bankers, food traders, commodity funds, retail food industry and foodgrain exporters who will use this new knowledge and data. They imply that the Food and Agriculture Organisation (FAO) will run the Amis and they will exploit the new data. Private sector players, such as the large grain traders for whom knowledge of stocks and harvests represent a key competitive advantage, are simply ‘urged’ to participate – they will, at a profit which further loots the urban and rural poor.

There are five main objectives the G20 ministers made commitments to. However, like earlier inter-governmental statements over the last few years concerning agricultural production and access to food, it’s always safer I find to consider what is being meant here.

If we look at the five objectives and take the first:
“i. improve agricultural production and productivity both in the short and long term in order to respond to a growing demand for agricultural commodities”

There is a growing demand for “agricultural commodities”. So investment and research and trade arrangements and enabling policy are to be deployed to help fulfil this kind of demand?

“ii. increase market information and transparency in order to better anchor expectations from governments and economic operators”

Do governments and “economic operators” (what are these? food traders? commodity funds? integrated retailers?) have the same kinds of expectations? Is better “market information and transparency” to benefit only government and “operators” or do food producers and consumers also require them?

To make best use of the land, the Jumma tribes of Bangladesh's CHT practise a form of ‘shifting cultivation’, growing food in small parts of their territory, before moving on to another area and allowing the land to recover. Photo: IRIN/Courtesy of Christian Erni/IWGIA

“iii. strengthen international policy coordination in order to enhance confidence in international markets and to prevent and respond to food market crises more efficiently”

Confidence in international markets may be a concern for governments and economic operators, but in what way are they essential for food producers and consumers, who have since late 2007 suffered through price spikes amplified by these same international markets? The implication here is that responses to “food market crises” can be provided by – among other measures such as policy direction – these markets, which I find troublesome especially given the evidence since 2007.

“iv. improve and develop risk management tools for governments, firms and farmers in order to build capacity to manage and mitigate the risks associated with food price volatility, in particular in the poorest countries”

What are these risk management tools? Are they commodity hedge funds? Are they trading agreement? Are they bilateral agreements and FTAs? Are they commodities exchanges? Who will wield these tools? In poor and the poorest countries farmers have little or no capacity to manage and mitigate existing risk – they surely cannot bear the additional risks brought about by price volatility, but in what way will these tools help and function?

“v. improve the functioning of agricultural commodities’ derivatives markets.”

To what end? Agricultural commodities derivatives markets tie up crop production and food-in-stock, but for whom do they do this? If the functioning of these markets is to be “improved”, who will benefit from this improvement? Will it be the smallholder farmer and if so in what way? How many farmers of the South are directly connected to the agricultural commodities derivatives markets as beneficiaries? Are consumer coops connected?

These are some questions that come to mind when reading these five objectives. I see that Sarkozy has stated, “”We all know that agricultural production is insufficient to meet demand”. This may be so, for certain crops in certain regions, but against the background of these five objectives, I have to question: demand from whom or what and to what end?

[See ‘The priorities of the agriculture G20’, Nicolas Sarkozy’s address at the G20 and you can get the G20 ministerial declaration here]

A vegetable seller waits for customers at the Wakulima market in Nairobi, Kenya. Photo: Siegfried Modola/IRIN

Here are a few sentences from paras 18 and 19 of the ‘ministerial declaration’:

“18. We commit to creating an enabling environment to encourage and increase public and private investment in agriculture. In particular, we stress the need to support public-private partnership on investments, based on a value-chain approach, for services (such as access to financial services, agricultural education and extension services), and for infrastructure and equipment for production (such as irrigation), for agroprocessing, for access to markets (such as transport, storage, communication) and for reducing pre and post-harvest losses.”

“19. We encourage countries, international organizations and the private sector to increase investment in developing countries agriculture, and in activities strongly linked to agricultural productivity growth, food security and generation of income in rural areas, such as agricultural institutions, extension services, cooperatives, research, roads, ports, cold chain, power, storage, irrigation systems, information and communication technology, climate change mitigation and adaptation. We also encourage them to enhance public-private partnerships in this field, in particular to improve market and value-chain operators’ cooperation and procurement from smallholders.”

This is a direct and unambiguous call for greater industrialisation of agriculture, for the strengthening of the tools of globalisation that have given rise to the agri commodity markets and products like derivatives, for the intensification of corporate R&D in agbiotech and with the support of national agricultural reseach systems in various countries – and at the likely cost of traditional knowledge and ecological approaches to cultivation. This sounds to me like an unambiguous statement of support for the food trading and food retail industries and their vast ‘verticals’ (as they call the integrative links these days), and finally for the systems of finance and banking that undergird the globalisation of food.

The stranglehold of finance capital over the state

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Women collect coal scraps from an overburden dump for a nearby open pit coal mine. Overburden is the fertile soil (formerly used for agriculture) that has to be removed to get at the coal underneath. In the process small pieces of coal are also picked up which are scavenged by local villagers to be sold for cash. Photo: Panos Pictures/Robert Wallis

Is ours the age of the struggle between the state and the market? Or is it the age in which the state bowed to financial control over it? From a perspective which integrates labour, environmental stewardship, cultural safeguarding and a just human development, the state is firmly in the grip of finance and its liberalisers.

What has come to be called neo-liberalism is in short the expression used to describe the relentless and growing control of resources of every sort, be they mineral, human or environmental. If there has been a problem of neoliberalism it is that it failed to increase the rate of profit consistently and never achieved levels comparable to those of the ‘Golden Age’ between 1948 and 1973. The series of ‘booms’ of various kinds, which caught the attention of investors, bankers and speculators, have had much to do with the seeking to replicate the conditions of those years (in Deutschland they called the period ‘die Fette Jahre’, the fat years).

Boys carry large lumps of coal that they have scavenged from an open pit mine near Dhanbhad. They will carry this coal several kilometres to sell in a local market. As mining has displaced agriculture, scavenging for coal on the edge of mines has become one of the means of survival for those who have been displaced from an agricultural life by mining. Photo: Panos Pictures/Robert Wallis

The essence of financial liberalisation, seen in its totality, is to ensure the stranglehold of finance capital over the State, Prabhat Patnaik has explained in a commentary in People’s Democracy (the weekly organ of the Communist Party of India Marxist). This may appear paradoxical at first sight: as the term ‘liberalisation’ appended to ‘financial’ suggests, the basic aim of the process is to liberate finance from the shackles of the State, ie, to ensure not the control of finance over the State but the negation of the control of the State over finance. But the remarkable aspect of financial liberalisation consists precisely in this: what appears at first sight as the liberation of finance from the shackles of the State is nothing else but the acquisition by finance of control over the State.

In his short essay, ‘Neoliberalism: From One Crisis to Another, 1973-2008’, Neil Davidson has explained that these booms were the result of the following factors which he enumerates as under:

The first and most fundamental was simply greater exploitation of the workforce, by increasing productivity on the one hand (making fewer workers work harder and longer) and decreasing the share of income going to labour on the other (paying workers less in real terms).

The second was the expansion of private capital into two new areas: first through the expropriation of the remaining ‘commons’ in the Global South, releasing value which had previously been embedded in nature and hence unavailable for the purposes of accumulation; then through privatising state-owned industries and public services, providing resources which-potentially at least-could be used directly for production rather than in the process of realisation or as part of the social wage.

The third was the emergence of new centres of capital accumulation outside the established core of the world system in East Asia and above all, in China, which contributed to a partial restoration of profitability as a manufacturer of cheap consumer goods for Western and, above all, US import markets, and as the source of loans to the US through Treasury Bonds, which are then loaned again to American companies and consumers.

The fourth, itself a result of profit rates failing to consistently reach what capitalists considered acceptable levels, was a fall in the proportion of surplus value being invested in production and the rise in the proportion being saved, to the point where the latter became greater than the former. The need to find profitable uses for surplus capital, where productive investment was insufficiently attractive, tended to draw industrial capitalists towards financial speculation. This did not mean that industrial capital became subordinated to financial capital – rather, their interests converged.

A series of murals painted by the Tribal Women's Artist Collective from Hazaribagh. The collective attempts to keep tribal artistic traditions alive in the face of population displacement from tribal areas due to the spread of mining and the conflict between the India army and Maoist guerillas. The designs and styles are unique to each individual artist and were traditionally passed down from mothers to daughters through the generations. Photo: Panos Pictures/Robert Wallis

The turn to finance had implications beyond a shifting focus of investment, which tends to be compressed into the term ‘financialisation’. But among all the complexities of arbitrage, derivatives, hedge funds and the rest, there are two essential points about financialisation which need to be understood. One is that, financial speculation, like several of the factors discussed here, can increase the profits of individual capitalists at the expense of others, but cannot create new value for the system as a whole. The other is that, in so far as profits were raised, one aspect of financialisation became more important than any other and consequently needs to be considered as a factor in its own right.

This, the fifth and final factor, was a massive increase in consumer debt. Credit became crucially important in preventing the return to crisis only after the post-1982 recovery had exhausted itself. In so far as better-off working class people have spent borrowed money on commodities which are above the minimum needed to reproduce their labour, it is a response to their situation under neoliberalism. But the main reason for increased debt has been the need to maintain personal or familial income levels.

Men transporting baskets of coal onto railway carriages at Sauanda railway yard. Most of the workers have migrated to work in the area having been displaced from their traditional livelihoods in the countryside. Lacking title deeds for land on which they have farmed and hunted for millennia, the rural adivasi communities are being displaced to make way for new industrial developments planned to capitalise on the land's mineral wealth. Photo: Panos Pictures/Robert Wallis

The points that Patnaik, Davidson and several others have been making, with increasing urgency in recent years, is that the freeing of finance capital from all social obligations like priority sector lending targets and differential interest rates, not only increases its profitability, even while pushing petty producers and small capitalists deeper into crisis, but also allows it to pursue its own profit-seeking ways over a global terrain, which has the effect of subjugating the State to the thralldom of internationalised finance capital.

In short, financial liberalisation is the process through which a fundamental change is enforced on the bourgeois State: from being an entity apparently standing above society and intervening for the ‘social good’, which means keeping in check to some extent the rapacity of big capital, even while promoting it and defending its monopoly privileges, the State becomes exclusively dominated by financial interests (with which big corporate interests are closely enmeshed) and loses its relative autonomy vis-a-vis such interests. We have not the ‘rolling back’ of the State as neo-liberal ideologues suggest, but State intervention in the exclusive interests of finance capital.

[‘Neoliberalism: From One Crisis to Another, 1973-2008’, Neil Davidson, Senior Research Fellow at the University of Strathclyde and a member of the Editorial Board of the journal International Socialism.]