European banks and financial institutions are supporting damaging speculation in agricultural commodity markets and financing “land grabs” in the developing world, a report by the environmental group Friends of the Earth said on Thursday.
Friends of the Earth accuses major banking groups, including Deutsche Bank, Barclays and HSBC, of engaging in practices which drive up food prices, remove smallholders from their land and degrade the environment.
However, market participants robustly defend their role in ensuring that markets flow smoothly, and refuted the suggestion that it is speculation, rather than a complex mix of climatic and political factors, that drive prices.
The Friends of the Earth report focused on two linked issues – speculation in commodity markets, which drives prices higher and creates volatility; and the financing of large scale land acquisition.
On the former, there is a growing chorus of non-government organisations (NGOs) that insist that financial trading of agricultural commodity markets – i.e. that done by actors who buy and sell the futures products without intending to take delivery of the physical commodity that underpins it – adds to volatility in pricing.
A report compiled for the G20 in June 2011 found that volatility in agricultural commodity markets had been greater since the turn of the Millennium, a period which also saw a rise in the number of financial participants in the commodity markets.
Poorer households spend a greater proportional amount of their incomes on food, and fluctuations in prices can seriously impact their quality of life.
Food price riots in the developing world were a feature of 2010, and many analysts believe that they sowed the seeds for the unrest in parts of North Africa that led to the Arab Spring.
That G20 report attributed that volatility to a number of factors – some climactic and some financial – but it did note that:
“While analysts argue about whether financial speculation has been a major factor, most agree that increased participation by non-commercial actors such as index funds, swap dealers and money managers in financial markets probably acted to amplify short term price swings and could have contributed to the formation of price bubbles in some situations.”
Futures are financial products that allow traders to set a price at a point in time for a commodity. They were designed to allow producers and buyers to reduce their risks – known as hedging – and have been part of the expansion of the globalised food market.
Some traders defend their role by saying that they provide liquidity in the marketplace, and say that volatility is inevitable in a market where supply is driven by weather events – by their nature unpredictable and changeable. A spike in cereal prices in 2011, for example, was largely attributed to a drought in Russia, which led to wildfires and an export embargo.
Traders' case is not helped by single incidences of hedge funds buying up large chunks of commodity markets. In July 2010, Anthony Ward, who runs the Armajaro hedge fund, bought 240,000 tonnes of cocoa, taking a massive and influential position in supply of the crop ahead of a period of political instability in Cote d'Ivoire, the world's largest producer.
Friends of the Earth issued a militant press release that claimed: “Food speculation and the financing of land grabbing leads to a catastrophic instability in global food prices – forcing millions of people into poverty and hunger. European banks, insurers and funds that speculate with food and land are gambling with peoples’ lives whilst reaping huge profits. This industry needs strict regulation to protect the poorest in society.”
The banks named in the report are accused of marketing products that add to this volatility by giving investors with no direct link to the food industry access to commodity markets.
However, when discussing the report, Daniel Pentzlin, sustainable finance campaigner for Friends of the Earth Europe, was slightly more conciliatory, accepting that there is little quantitative evidence to support the claim.
Pentzlin suggested that the bubble that developed around the Russian wheat shortage, which lead to high prices limiting supply to consumers, was exacerbated by speculation
“It’s highly unlikely – although you can’t prove it – that without this speculative overshoot that it would have created a shortage of supply without these high prices,” he told the Huffington Post UK.
"You have a certain degree of volatility but actually it should be the role of these financial markets to deal with this volatility, to deal with it and also to create products to allow farmers to lock in their prices and for consumers to have reliable and sustainable prices. In effect, it doesn’t work,” he said.
“I wouldn’t say that speculation itself is the sole or major creator of volatility. You have the volatility and instead of providing financial services that are leveling that out for buyers and producers, it’s exaggerating that volatility.”
Barclays declined to discuss the report, and several other financial institutions implicated in the report did not respond to requests for comment.
A Deutsche Bank spokesperson said that the bank was undertaking its own research into the link between speculation and food prices.
Privately, however, several institutions expressed disappointment at the resumption of a debate that, while they acknowledge is important, they believe is one that needs serious analysis and quantitative evidence.
Each also repeated their defence – that while there may be a case to say that speculators do have an impact on the magnitude of price swings, the size of their positions in the market, relative to the massive scale of the trade buyers, means that that impact is marginal. Furthermore, they say, any effect is short-lived.
“I think an important counter argument is that while it may be true that over a longer period, speculative overshooting might be corrected … these speculative bubbles really hurt people on the ground,” Pentzlin said.
“If the prices for staple foods are excessively high over a couple of months, it means that people are starving.”
Pentzlin noted that the Commodity Futures Trading Commission (CTFC), the US regulator, has been working on defining what constitutes “excessive speculation” in a bid to make markets more responsive to their fundamental, underlying drivers. Similar focus is being proposed in Europe.
The NGO might be on safer ground with its second target – the financing of land acquisitions in developing countries.
As trends in food consumption change, in particular the growing appetite in emerging markets for meat products, the amount of arable land needed to supply the world’s needs is growing.
With much of the uncultivated land in the world falling in developing countries – Brazil, Ukraine and parts of Southern and Eastern Africa are increasingly popular destinations – there is a high risk that deals are not inclusive of local communities.
In December, a major piece of research by the International Land Coalition (ILC), a grouping of 40 organisations, estimated that more than 200 million hectares of land in developing countries had changed hands in large scale deals between 2000 and 2010.
Handling such deals has been a difficult challenge for international agencies and development bodies, who understand the critical need for investment in areas that lack infrastructure. The World Bank and other institutions have been working on codes of conduct to support governments and businesses when signing over land.
“While large land deals can create opportunities, they are more likely to cause problems for the poorest members of society, who often lose access to land and resources that are essential to their livelihoods,” the ILC report said. It also found that much of the land bought was cultivated for biofuels, rather than food.
Land rights in many developing countries are not necessarily registered, leaving deals open to corruption and to the disenfranchisement of local smallholders. They are also, if badly handled, contributors to deforestation and environmental degradation.
Friends of the Earth named a number of European institutions, including Deutsche Bank, HSBC, Generali, Unicredit, Credit Agricole and Allianz, which directly or indirectly finance land acquisitions, and calls on them to more actively take an interest in the practices of companies that they lend to.