The financialization of agricultural markets and food security do not mix well. A recent UNCTAD 2013 analysis has once again demonstrated the ravages of the unregulated liberalization of agriculture. In one of the comments of this recent analysis, UNCTAD involved the Institute for Agriculture and Trade Policy (IATP) , and the conclusion is again clear: the inherent failures of agricultural markets, compounded by the growing and excessive financialization of futures markets have not only weakened policy decisions but have seriously affected global food security. The public cost of deregulation and the extreme financialization of global agriculture are unsettling for more than one government, as highlighted by the IATP commentators.
Soaring prices in 2008 coincided with a growing interest in the commodity derivatives markets by financial investors who considered commodities as a simple asset category; a situation which, aided by the blind belief in the virtues of the market, encouraged excessive speculation and short-term visions and contributed the now structural price hypervolatility.
Result: food security and agriculture have become more vulnerable than ever not only to external shocks but also to endogenous risks, which are the specificity of contemporary agricultural markets.
No, markets are not efficient, and yes, regulatory tools should again be used by the world's governments if tomorrow we do not want to live global and irreversible collapse. It is urgent to adopt structural reforms based on regulated agricultural trade and supervised financial practices as the only guarantees for the viability of agricultural economies.
momagri Editorial Board
Much of the international debate on trade and agriculture, from the founding of the World Trade Organization (WTO) to the recent rise of agricultural commodity prices, has focused on the damaging effects of agricultural dumping (i.e. exporting at below cost of production) by agribusiness corporations based in the EU and the United States. Since 2008, as a result of the global food price crisis, this focus has shifted to concerns about price volatility. But both dumping and volatility are symptoms of the same bad policy decisions: a weakening of government oversight in setting and implementing agricultural, financial and trade rules. While this approach has been a boon to agribusiness companies operating around the globe, it has been damaging to farmers and those struggling with food insecurity. Equally important, this era of volatility threatens to overwhelm efforts to transition to more resilient, ecologically friendly agricultural production that is essential in the present context of climate change. The international debate needs to shift once again to a focus on the right kinds of rules to rebuild resilient food systems. Substantive structural reforms of agricultural, financial and trade policies would be a major step forward.
Liberalizing trade and increasing food insecurity
The liberalization of trade rules greatly accelerated in 1994 with the passage of the North American Free Trade Agreement (NAFTA), which set the standard for subsequent bilateral and regional trade agreements involving the United-States, such as the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA), and those negotiated between Mexico and other trading partners. It also influenced the nature of trade deals pursued by the EU. Shortly after the passage of NAFTA, the WTO came into being in 1995, and various WTO agreements (particularly the Agreement on Agriculture) induced the further opening up of markets in developing countries. These bilateral and multilateral agreements limited the policy options available to these countries to protect their farmers from dumped imports and to support their farmers in boosting food production. This wave of agreements to liberalize trade and deregulate capital movements opened developing economies to foreign corporate investment that focused on expanding large-scale industrial food production for export. As a result of these changes, many countries that had previously produced most of their own food became dependent or imports. A dramatic example is that of Haiti, which produced 80 per cent of its rice requirements in the 1980s, but now, following decades of deregulation and liberalization, imports 80 per cent of its rice.
During the WTO’s first decade of existence, dumping by multinational agribusiness companies was both widespread and highly destructive. The Institute for Agriculture and Trade Policy (IATP, 2005) calculated dumping margins for United States commodity crops during the period 1990-2003 and found that wheat, corn, soybeans, rice and cotton were consistently exported at well below the cost of production (ranging from 10 per cent for corn to more than 50 per cent for cotton). A subsequent study by Wise (2010) also found that dumping of United States commodity crops and meat on Mexico was commonplace during the period 1997-2005.
While trade liberalization, or free trade, was touted as a way to improve food security, it has unquestionably failed. Floods of dumped imports, especially during the harvest, can be devastating for developing-country farmers, and they increase dependence on food imports. Additionally, trade rules have facilitated the further concentration of global food supply in large private firms, thereby disempowering not only farmers and consumers, but even governments. Dependence on this increasingly concentrated global food supply in large private firms, thereby disempowering not only farmers and consumers, but even governments. Dependence on this increasingly concentrated global food security chain, dominated by private players, increases importing countries’ vulnerability to shocks, whether from extreme weather events or excessive financial speculation in agricultural commodity markets. Moreover, the shift towards a greater role for the private sector in managing the global food supply has coincided with the rising global rates of hunger – from 788 million worldwide in 1995 – 1997 to 925 million in 2010 (FAO,2011).
Financial market deregulation
How financial markets and commodity futures markets are regulated is another factor that strongly affects agricultural production. A series of laws passed by the United States Congress, beginning in the early 1990s and culminating in 2004, succeeded in opening up commodity futures markets to a flood of new speculative money. In 2004, Hank Paulson, Treasury Secretary in the George W. Bush Administration and then chief executive office of Goldman Sachs, successfully lobbied for an exemption from the rule that investment banks maintain large enough currency reserves to cover their unsuccessful trades. The rule exemption freed billions of dollars that Goldman Sachs and four other banks used for high-risk investments, including commodity index fund bets (IATP,2008).Commodity index funds (which deal in agriculture, energy and metals) exploited these new loopholes and flooded commodity markets with money, betting thereby to drive up prices, regardless of the market fundamentals of supply and demand. For example, in March 2008, the unregulated biggest players, Morgan Stanley and Goldman Sachs, owned 1.5 billion bushels of Chicago Board of Trade corn futures contracts, while all corn producers and processors had the means to hedge only 11 million bushels against price swings.
These unregulated funds controlled 33 per cent of all United States agricultural futures contracts during the period 2006-2008 (Suppan, 2009). Most of this excessive speculative activity takes place in over-the-counter trading, which is traded off-exchange and is not subject to trade data reporting requirements, or to margin collateral and other requirements of regulated exchanges. When these Wall Street Funds sold out their contracts in mid-2008, prices tumbled. Overleveraged financial firms, without reserves to cover losses, were insolvent counterparties to these risk bets until they were recapitalized by the United States Congress and taxpayers. Today, these same financial speculators continue to destabilize commodity markets in the United States and elsewhere.
The role of excessive speculation on international agriculture markets has been well documented by a host of international agencies of research institutions, including, most recently, UNCTAD (2011). The UNCTAD report, through an analysis of data as well as extensive interviews with financial traders, describes the new forces of financialization in commodity markets, beginning in 2004, and their contribution to steadily rising prices and increasing volatility.
Finally, it is impossible to overstate the enormous costs of financial market deregulation to government budgets around the world. Agriculture has not been spared by the global financial collapse, as less and less money is now available for food aid, and for investments for increasing production in developing countries, for promoting sustainable agriculture and for agricultural adaptation to climate change, among many other needs.
From volatility to sustainability
The seeds of current price and supply volatility in agricultural markets were planted several decades ago through a series of policy decisions that have gradually strengthened the hold of large agribusinesses over markets and disempowered both farmers and countries struggling with food insecurity. To help address the enormous challenges related to food insecurity and environmental and climate degradation in the coming years, market reforms are needed to make agriculture more economically and environmentally sustainable. The issue is not only about whether subsidies are right or wrong, but rather how best to invest public money establish regulatory oversight to create the right food system. A new set of values must be injected into policy-making that gives priority to food security, farmers’ livehoods, environmental sustainability and resilience, and democratic decision-making.
1 Extracts from 2013 UNCTAD’s report « trade and Environment Review 2013, wake up before it is too late ». To read the full report, follow this link http://unctad.org/en/PublicationsLibrary/ditcted2012d3_en.pdf