The Financialisation of Food Commodities: At What Costs?

IMAGINE the price of rice fluctuating widely like stock prices – prices going through the roof one moment and hitting rock bottom the next moment fairly regularly. This may happen in Southeast Asia. A report by the Asia Society and International Rice Research Institute Task Force published last month suggest that Singapore can play a leading role in regional food security and help stabilise rice prices by hosting rice futures market.

A stable and predictable rice market is highly desirable. Whether it can be achieved through a futures market however remains doubtful. Futures market enables futures exchange in which investors trade standardised futures contracts i.e. a contract to buy specific quantities of commodities at a specified price with delivery set at a specified time in the future. Investors bought futures contract by speculating on the future price of commodities.

The agricultural commodities markets have in recent years witnessed large-scale influx of non-traditional investors such as pension and hedge funds, sovereign wealth funds and financial institutions. Given the slowdown in credit and equity markets, investment banks such as Barclays, Goldman Sachs and JP Morgan relied on commodity revenues as one of the drivers of recent profits. They see the trend of rising food prices as commodity price boom and trade in them. Goldman Sachs for example netted USD 1 billion in profits from speculating on food prices in 2009. This activity caused food prices to become more volatile and to rise and fall more sharply. Such volatile prices destabilises markets not just for consumers but also for farmers in developing countries who find it difficult to plan and invest for the future amid intense price volatility. Speculation is thus a key force behind the recent hyperinflation of basic food staples: Between 2005 and 2008, food prices rose by 83 per cent with maize prices nearly tripling, wheat prices increasing by 127 per cent, and rice prices by 170 per cent.

Financial speculators have come under renewed fire from anti-poverty campaigners such as the World Development Movement (WDM). WDM likened speculation in food commodities to “hoarding food in the midst of a famine, only to make profits on rising prices” and argued for a regulatory clampdown on hedge funds and banks in the commodities market. The United Nations also warned of a new food crisis unless rampant market speculation is regulated.

Rice is more than a commodity in Southeast Asia. It is the glue that binds societies and cultures throughout the region and a volatile and unpredictable prices could fuel social unrests. It is much more desirable to enhance existing frameworks such as the ASEAN Integrated Food Security (AIFS) Framework, the ASEAN Plus Three Emergency Rice Reserve (APTERR), and the . ASEAN Food Security Information System (AFSIS)

Rice is too important to be left in the hands of financial speculators.