Friday, October 15, 2010

More effective financial regulation is fundamental to global food security

Jayati Ghosh in the Guardian’s “Poverty Matters” blog: …As World Food Day comes around this year, there is muted media discussion and hazy public awareness about the real causes of the persistent food crisis or of how the large majority of people in the world are engaged in an intensified struggle to ensure adequate food for their families. The global situation is not much better than it was two years ago, and there is a real possibility of a repeat of the crazy price movements witnessed during 2007 and early 2008, which destabilised food consumption and added to poverty in so many places.
….It was speculative activity in commodity futures markets, enabled by financial deregulation, which led to wild swings in global oil and food prices. The cost of basic grains and other staples rose rapidly, fell sharply, and has been rising again in the past year. Index investors and other financial agents with no interest in holding commodities were allowed to invest in commodity markets and treat futures contracts like any other financial asset. The volume of unregulated over the counter contracts has tracked food price changes in both future and spot markets, showing huge changes even while actual demand and supply of food in the global market changed very little.

This can easily happen again, unless strict regulation prevents such financial activity. The Dodd-Frank Financial Reform Bill, recently passed in the US, contains some necessary regulations, bringing all futures contracts into regulated exchanges and requiring some position limits for investors (based on proof of actual interest in the commodity). But a great deal will depend on the implementation. Meanwhile, the European Union's proposed legislation is very weak and will effectively allow such speculation to continue….

Line drawing of a cornucopia by Pearson Scott Foresman

No comments: