Immediately after the Russian invasion of Ukraine, ominous reports about food shortages appeared in the media. On 24 February, the very first day of the war, the International Food Policy Research Institute (IFPRI), a commercial agricultural research centre, posted a blog in which it warned that this war could seriously affect the world’s food supply.

The already high prices (due to corona, poor harvests in South America, distribution problems and rising fuel prices) could be pushed to an all-time high: ‘Russia’s invasion of Ukraine will further disrupt global markets, will have negative consequences for global grain supplies in the short term, and by disrupting natural gas and fertilizer markets, have negative impacts for producers as they enter a new planting season,’ the IFPRI researchers wrote.

‘While food inflation threatens to negatively affect the global economy, informed investors can actually benefit’

What is less obvious, although the first signs are already visible, is that prices are not being pushed up by shortages alone. It is difficult to gain insight due to a lack of transparency, but there are forces at play with the potential to determine the fate of millions of people in the poorest regions of the world.

Opportunities

Investors could already smell the opportunities back in October 2021, when a confluence of global problems caused food prices to soar to unprecedented levels. Jake Hanley, Senior Manager Grain at the agricultural investment group Teucrium, points out the opportunities to his clients: ‘While food inflation threatens to negatively affect the global economy, informed investors can actually benefit from an upward trend in rising prices.’

A few months later, when a war is added to the mix, investors are instructed on how to leverage this dire situation to their advantage. On 7 March, when wheat prices had risen to a new all-time high, the influential US bank JP Morgan encouraged its clients to invest cleverly, using the headline: ‘Five commodity trading ideas to hedge against inflation’. The challenging invitation: ‘Could you strike gold with wheat or oil?’

The speculative behaviour of investors condemns many of those who are poor to starvation

For example, food prices were 34 per cent higher in April than during the same period the previous year. But it is difficult to ascertain whether and how speculation in the financial markets has contributed to this. However, thanks to in-depth research by the investigative platform Lighthouse Reports and Follow the Money, in cooperation with the Der Spiegel and The Continent weeklies and The Wire news platform, we can now pinpoint the problem.

According to experts, the data we collected from financial and commodity markets show that shortages are not the only reason food prices have soared. In all likelihood, the speculative behaviour of investors is also to blame for the fact that those who are already struggling to make ends meet are now being condemned to starvation.

For example, when asked, investment manager Invesco only points out that basic supply and demand mechanisms are still the main factor in price trends: ‘The rise and fall of commodity prices on a monthly basis is strongly linked to the value of the US dollar and the global economy, and not to the level of investment in commodity funds.’

Teucrium also refrains from elaborating on specific data. The fund only states that ‘investment in commodities stimulates production, efficiency and investment’ and says this ultimately results in ‘more reliable commodity (food) supply and less price volatility in the long run’.

But according to economist professor Jennifer Clapp, who recently researched the most important factors for food price increases, the whole problem is that such statements are difficult to verify: ‘The lack of information is like a big black hole. It should not be this way, especially because of the social importance of the matter.’

Political will

Nevertheless, leading experts and academics, to whom we also submitted our data, see typical indications of price-inflating speculation.

Professor Michael Greenberger, former director of the US regulator CFTC, responds: ‘This is an excellent analysis that strongly suggests that extreme speculation disconnects commodity prices from the normal principles of supply and demand. The markets are flooded by speculators who do not care about the true costs.’

Investment expert and whistleblower Michael Masters highlights the same problem. ‘When speculative powers hold the biggest stakes, their motives will start to dictate price development. You then get a lot of price developments linked to the following of trends, or the scaling up of those trends, to heights that would not have been reached if it hadn’t been for the speculators.’

David Bichetti, an economist at UNCTAD, the UN’s trade and development agency, says that although an upward trend in speculation has been evident for some time, there is no denying that current investor behaviour is affecting wheat prices. ‘Given the price dynamics, it is hard to ignore the fact that market sentiments have led to price increases. Speculation seems to have exacerbated the price dynamics.’

Meanwhile, politicians are well aware of the risks. Moreover, following an emergency meeting in March due to the war in Ukraine, G7 agriculture ministers stated that they will not tolerate artificial price inflation: ‘We will also fight against any speculative behaviour that endangers food security or access to food for vulnerable countries or populations.’

Shocked politicians understood that it was necessary to limit speculative forces

Yet, a glance at the facts shows that politicians are mainly guided by the financial lobby, which has proven to use every trick in the book to dodge stricter regulations.

The most obvious example was the previous major food crisis (2008), when shortages threatened the stability of the Arabic world. Shocked politicians in Washington and Brussels understood that, in order to prevent new crises, it was necessary to limit speculative forces and the relentless pursuit of maximum profits.

‘Unaccceptable attack’

In the years that followed, the discussion mainly focused on the so-called position limits, i.e. caps that set a limit on the interests that investors are allowed to accumulate.

The idea was that individual investment funds should not dominate too much of the market, because then they could manipulate prices. Regulatory bodies in both the United States and Europe agreed that a cap should be placed on the options contracts that traders are allowed to hold.

But the financial lobby saw this as an unacceptable attack on their freedom to trade. According to investors, the introduction of position limits would actually harm the market by making investors more picky in their choice of commodity contracts. This would make it more difficult to trade, which would not reduce price volatility and result in market barriers.

In high spirits

In the end, the battle regarding position limits in the United States spanned a whole decade. After the American regulatory body CFTC was given the power to introduce a maximum in 2010, the lobby of financial giants such as Goldman Sachs, JP Morgan and Barclays succeeded in taking the introduction of limits off the table again through a lawsuit.

The verdict concluded that it had not been proven that such regulation is ‘necessary’. Consequently, it was not until 2020 that legislation was drafted. But this was seen as controversial, even at the top of the regulatory body CFTC, because of its lack of effectiveness.

In Brussels, however, it seemed for a long time that general interests would triumph over investor interests.

Progressive parties and civil society organisations were in high spirits when new regulations to curb speculation on commodities were agreed upon in early 2014. ‘We finally had a deal that could change the course,’ recalls MEP Bas Eickhout (GroenLinks). ‘We were genuinely pleased about that.’

‘The European Authority makes decisions based on unverified and intransparent data, mainly from the financial sector’

It appears that they cheered too soon. The European Securities and Markets Authority (ESMA) became responsible for the technical elaboration of the new rules. And this European regulatory body allowed itself to be influenced by the same financial lobby that had undermined the American legislator.

Political scientist Yiorgos Vassalos, who holds a PhD on the development of European financial regulation, uncovered how large banks and investor associations influenced the European Authority in 2014 and 2015. Vassalos discussed this with, among others, a former ESMA employee and a member of ESMA’s advisory group: ‘Decisions are made based on unverified and intransparent data, mainly from the financial sector. There is no objective methodology for policy making.’

The result: regulatory body ESMA gave investors so much leeway that, in practice, the position limits still leave plenty of room for price manipulation.

Pandemic-related legislation

But there is more to it than that. When the pandemic shook the world in 2020, the financial sector convinced the European Commission to review the rules in the interim. The excuse: a quick adjustment was needed to keep the economy going. Many position limits were waived anyway, especially in the energy sector.

A basic principle was ignored: the relationship between food prices and other commodity prices such as energy’

Lawyer Marc-Olivier Herman, who monitors the European policy processes on behalf of the NGO Oxfam, witnessed with dismay how the already spacious playground for speculation was further expanded as a result.

The fact that the position limits for food remained intact in this review does not detract from this, in his opinion. ‘A basic principle was ignored: the relationship between food prices and other commodity prices such as energy. Hence, waiving limits on speculation with other commodities will also affect the volatility of food prices.’

The new regulations came into force in February 2020, just before the outbreak of the disruptive war in Ukraine that would push energy and food prices to all-time highs.

How much the Brussels quick fix exacerbates the situation is hard to say. In its haste, the European Commission had neglected to research the impact of the policy change. It blindly acted on the advice of the financial supervisory body ESMA and on that of the financial sector.

The Member States and the European Parliament, where the political urgency had faded since the last food crisis, followed suit without much of a fight. With all the lockdowns going on, they had other things to worry about than appeasing investors’ appetites.

The speculators’ agenda

This year, a thorough review of the legislation governing the financial sector is on the European agenda. The Commission has already taken a first step, which suggests that the energy market will be able to scrap position limits permanently.

But the Member States and the European Parliament have the last word. The big question is whether they will deliver on the promise of the G7 agriculture summit. Will they indeed fight ‘the speculative behaviour that threatens food security’?

Translation: Delia Burggraaf