The intensity of the food crisis that hit many developing countries from 2008 was particularly on account of the very sharp global volatility in food prices. Between January 2007 and June 2008, world trade prices of major food grains nearly doubled on average. They fell between June 2008 and early 2009, but have been rising again in the past year. Meanwhile, the number of countries experiencing food emergencies and severe to moderate food crises remains high and the proportion of vulnerable population in the developing world has actually increased. The pass through of global food prices tends to be much higher during periods of rising world prices than when prices fall, and in many countries food prices are now higher than they have ever been, even as wage incomes have stagnated or fallen. Both cultivators and food consumers appear to have lost in this phase of extreme price instability, with the only gainers from this process being the intermediaries who were able to profit from rapidly changing prices.

The wild swings in prices cannot be explained by seasonal supply and demand factors or any other ''real economy'' tendencies. Instead, they are are clearly the result of speculative activity in these markets. Financial deregulation in the early part of the current decade gave a major boost to the entry of new financial players into the commodity exchanges. Unlike producers and consumers who use such markets for hedging purposes, financial firms and other speculators increasingly entered the market in order to profit from short-term changes in price. There was a consequent emergence of commodity index funds that were essentially 'index traders' who focus on returns from changes in the index of a commodity, by periodically rolling over commodity futures contracts prior to their maturity date and reinvesting the proceeds in new contracts.

Thus international commodity markets increasingly began to develop many of the features of financial markets, in that they became prone to information asymmetries and associated tendencies to be led by a small number of large players and allowed for inherently 'wrong' signalling devices to become very effective in determining and manipulating market behaviour.

Regulation to prevent such casino behaviour in commodity markets is an essential element to mitigate the food crisis and prevent future crises, even if it is not the only measure required. The recent Dodd-Frank Financial Reform Bill passed by the US Congress has some important features towards such regulation, though how they will be implemented is crucial. But the proposed legislation in the EU is still too weak to have much impact, especially because it does not even specify position limits for traders in commodity futures markets. To prevent future food crises with even more devastating impact from ravaging people across the world, much more stringent control over finance is a minimum necessary condition.

January 13, 2011.