Denkanstöße (Food for Thought)

October 16 was World Food Day, and it probably won’t come as a shock that a number of activist groups chose the occasion to publicly protest in Frankfurt for their causes. It was, however, a pleasant surprise to see an in-depth and balanced article on the protests and the underlying issues in a German-language article in the October 12 Frankfurter Allgemeine Zeitung (read our unofficial English translation here).

The critics insist that food shortages are due to financialization of the physical commodity markets. As the article’s author, Dennis Kremer, explains:

“To put it bluntly, the allegations are that up there in the boardrooms of the financial institutions they are making big money at the expense of the world’s poorest; and in the face of more than 840 million people who are starving – who would not find this abominable?”

Indeed. But Kremer proceeds to deftly unpack – and refute – the allegations. He starts by discussing a pair of agricultural economists (Thomas Glauben and Sören Prehn) and a financial ethicist (Ingo Pies) who have carried out and continue to undertake studies which thus far have reached a very different conclusion. The researchers:

“…make statements that all those against speculation must find difficult to stomach: The strong presence of the investors on the agricultural markets is not an evil, but a blessing.”

Let’s look at one of the activists’ main targets: Exchange Traded Funds (ETFs). There have been massive inflows of cash into ETFs over the last decade, a period that saw the price of corn almost triple.  Has the former caused the latter? Glauben and Pies say no:

“In a new, as yet unpublished, study they have been examining whether there really is a link between the new strength of the index funds and the price rises among foodstuffs. The surprising result is that there is not the slightest link. Rather it demonstrates much the opposite: according to the study, the presence of such funds has helped curb even greater price rises.” [emphasis ours]

How can this be? Glad you asked:

 “…the higher demand for futures market securities is actually good for farmers because a higher demand for the funds conversely signifies that more farmers can insure themselves with financial futures against a drastic reduction in agricultural prices, and at more favourable terms. A simple market-based logic is behind this: the greater the range of insurance options available (i.e. the capital in the index funds), the lower the premiums the insured (the farmers) have to pay.”

So the existence of the futures market, transmitting clear price signals, makes the supply and demand process more efficient, and limits volatility. Ultimately, it gives farmers the security to take risks in cultivation or land use which can result in higher crop yields in the medium term – and more food for everyone overall.

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