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.