Speculators pushing up food prices, questions UN

By Lindsey Partos

- Last updated on GMT

Related tags: Futures contract

Speculators outside of the food industry pouring money into
financial mechanisms in the commodity markets could be cause for
concern, says the UN's Food & Agriculture Organisation
(FAO).

In a far-reaching report on global food prices released today, the UN questions the contribution of institutional investors to the recent 'turmoil in commodity markets.' "A key concern now is the participation of new agents that are perceived to be motivated by risk-diversification to the exclusion of serious assessment of price levels,"​ states the FAO's annual Outlook report. Food industry players are increasingly turning to tools of the derivative markets, such as futures and options, to help manage risks linked to the volatility of commodity prices. And as world prices for wheat, maize and oilseed crops doubled between 2005 and 2007, confirms the FAO, tools that help food firms understand, and cope with, future costs for their businesses are clearly of value. But attracted by potential gains to be had through the price volatility of the commodity markets, institutional investors outside of the food industry have recently brought "vast amounts of money​", say the UN, to these areas. Derivative-markets prices in the US, such as options and futures for wheat, soybeans and maize, are widely quoted as indicative prices and are the focus of much commercial activity. Ideally, says the FAO, these markets help to pool information at low costs to help discover prices and provide a venue for trading risk. But, citing data from the US Commodity Futures Trading Commission, the FAO states that monthly trading volumes increased from February 2005 to February 2008 by a whacking 125 per cent for wheat, a considerable 85 per cent for maize, and 56 per cent for soybeans. According to the FAO, total open interest in maize, for example, rose from 0.66 million contracts in February 2005 to 1.45 million in February 2008, during which time non-commercial traders', - that is, non-food industry participants - share in opening interest in long (a commitment to buy) positions increased from 17 per cent to a considerable 43 per cent. A pattern repeated in the wheat and soybean derivative markets. Furthermore, speculators "tend to take one-sided positions...known to be hedging other risk in their portfolios typically by taking long positions - a commitment to buy, as opposed to short positions - commitments to sell,"​ explains the report. The aggregate effect of all their activities in the commodity markets is that the speculators are, arguably, pushing up derivative market prices in the short term. In turn, helping to drive up the raw material prices for the food supply chain, from farmer and ingredients maker, to processor and retailer. And given the presence of this massive volume of non-commercial investments, plus the fact that "they move in and out of commodity trading",​ increased price volatility "seems a plausible result" in the short term, warned the report. Reflecting on the long term impact of speculators' involvement in the commodity markets, the FAO said "the jury is still out".

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