UN report plays down food price speculators

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Why are food prices soaring when there is plenty of food around?

The United Nations Food and Agriculture Organization (FAO) in Rome has some answers. But it plays down the importance of the one factor -- speculation -- that seems to be playing a big role in the price hikes.

The FAO on Wednesday released its flagship "Food Outlook Report," a biannual publication larded with stats and analysis that examines short term-term trends. To its credit, the agency has been warning for half a year that prices were on a roll and might be headed back to the "crisis" levels of 2007-08, which triggered food riots in dozens of poor countries as wheat, rice, oilseeds and other items became unaffordable to large segments of the population.

Of course, the best cure for high prices, as they say, is high prices, and prices duly came down. Then the financial crisis and the recession struck, and they came down again. They reversed course dramatically in the summer, thanks to a sharp fall in Russian wheat production, followed by a wheat export ban; slowing exports from other big wheat producers, notably Ukraine; falling maize (corn) yields in the United States; the sinking dollar; and horrendous food inflation in China, which in October climbed at a 10 per cent rate.

As a result, overall prices are close to their June, 2008, record high, and could go higher, depending on the success of next planting season, the replenishment of stocks (or lack thereof) and, of course, the weather.

That is not to say a new food crisis is imminent. The FAO also points out the good news -- food still seems in ample supply. For example, wheat stocks are forecast to fall 10 per cent but will still be 25 per cent higher than 2008's level. While the global rice harvest is being scaled back somewhat, it is still forecast to come in at a record, "sufficient to cover world consumption but without the need to draw down reserves," the FAO says. Oilseeds output will remain close to last season's record level. And so on.

At the FAO press conference, the question was asked: If food is heaped up everywhere, can the speculative inflows of managed money take some or all of the blame for the price rises?

The answer was maybe, perhaps, really don't know.The FAO's chief grains economist and analyst, the well-respected Abdolreza Abbasssian, acknowledged that "there is no doubt speculative activities have brought into the market a great deal of volatility." But he added there was "no proof" that speculators have driven up prices to near record levels in recent months.

While there may be no proof, there is certainly ample evidence that the speculative money flows are working their dark magic.

There is no doubt that since financial deregulation in Europe and North America went wild in the 1990s, huge dollops of money have flowed into the commodity futures (the FAO background notes say the sums are "colossal"). In the last decade alone, agricultural trading volumes have tripled on the CME Group (the merger of the Chicago Board of Trade and the New York Mercantile Exchange) and Euronext Liffe. These inflows have to have an impact on prices, even if the speculators don't actually take delivery of the food and stuff it in warehouses in Chicago and New York.

Another big clue that speculators are running amok comes from the Chicago Board of Trade open interest contracts. Take maize. Between April and October, the number of contracts rose more than 50 per cent, to 2.36 million. Wheat and soybean contracts recorded a similar rise. Between April and mid-October, cash prices for maize went from $3.45 (U.S.) a bushel to $5.56.

Looking at these figures, it's hard to deny that the speculators are playing some role in the price hikes, perhaps a considerable one.

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Shiva Makki, a senior World Bank economist in Washington whose specialty is agriculture markets, thinks there is no doubt the speculators are driving prices. In a recent note, he noted that wide spread between wheat futures and the physical cash market (then $5) and concluded that "The current spike in wheat prices is again caused by speculation of traders in the Chicago commodity exchange."

The truth is that the UN food agencies (there are three) are shy about blaming speculators for causing damage. The speculators come from the United States, Britain and Canada, each of them big sponsors of the agencies, meaning it is politically hard to criticize them. The truth, however, says speculators could trigger another food crisis. The FAO should come clean and say so.

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