By Jürgen Klute MEP - 18th November 2011
Restricted market access for financial investors would ensure that commodity future markets would recover their true function: risk protection for traders and producers and price discovery
Jürgen Klute MEP
Greater supervision and transparency in the financial markets is urgently needed, writes Jürgen Klute.
What is most irritating to Europe leads to serious problems in countries like Mali, Pakistan and Ethiopia. Where poor households in Germany spend around 15 per cent of their income on food, this often represents over two thirds of income in poor countries of the south.
Hence, if food prices rise by just a fraction, this immediately causes serious difficulties in many coun-tries. According to the 2011 World Hunger Index just published by the international food international food policy research institute (World Famine Relief), this would mean a loaf cost-ing around €30 and a bag of potatoes €50 in Europe.
Moreover, rising prices are not the only problem – the huge fluctuations in food prices in recent years have hit small farming units hard, particularly in southern countries.
Usually small farmers at subsistence level in these countries have to buy food just before the harvest, which often gets them into debt - food demand is not price-elastic and everyone has to eat - however high prices are. If the harvest is then brought in, supply will be high at least regionally and this can lead to falling prices in the short term.
However, farmers are compelled to sell a large part of their harvest quite quickly, since they have got into debt, they need to pay for their children to attend school and often because they don’t possess sufficient storage space for large quantities of agricultural produce.
This vicious circle means that the risk of famine is especially great in rural populations, according to research by the Food and Agriculture Organisation.
In view of many researchers, a major reason for this enormous volatility is the increasing in-vestment in index funds and recently in exchange traded products involving raw materials and agricultural produce.
On the one hand, massive investment in relatively small markets leads necessarily to rising prices and, on the other, financial investors in agricultural and raw-materials markets behave as the financial markets dictate.
As research of the FAO in conjunction with the Austrian chamber of labour demonstrates, one consequence of this process, known as ‘financialisation’, is an increasing herd instinct in commodity futures markets.
Decisions of financial investors on whether to buy and sell are not based on fundamental data but on trends in financial markets. And because financial in-vestors have committed large sums to the markets, other market participants tend to imitate the decisions of the big players in order to avoid losing money themselves.
Occasionally they even act in defiance of what they know to be fundamentally sound, because they assume that the financial investors with their market power will move the price in another direction.
There are practical measures against such excessive and damaging speculation: position limits can provide clear boundaries which individual investors should adhere to for particular prod-ucts, which helps limit the concentration of market power.
Restricted market access for financial investors would ensure that commodity future markets would recover their true function: risk protection for traders and producers and price discovery.
Additionally, much greater mar-ket transparency is needed, as well as the opportunity for supervisory authorities to intervene directly in the market when strong fluctuations occur.
