Banks on the Counter-Attack in the Food and Finance Debate

Jennifer Clapp

NGOs have stepped up their critique of large investment banks’ involvement in agricultural commodity derivatives markets in recent months. Now, it appears that the banks are starting to fight back.

Last September, the World Development Movement estimated that Barclays earned some $785-million from financial speculation on food commodities in 2010 and 2011. And last month a new WDM report estimated that Goldman Sachs’ earnings from food price speculation in 2012 were over $400 million.

These figures were the latest to come out of a prominent NGO campaign against ‘gambling on hunger’ that has captured widespread attention and concern, particularly in Europe, over the past few years. Investment banks have been a primary target of this campaign, given their important role in facilitating large-scale financial investments in agricultural commodity derivatives, which NGOs say is responsible for food price spikes and rising hunger in the world’s poorest countries.

The NGO critiques have been powerful and initially caused several large investment banks to pause to consider whether such investments were worth the dent to their reputation. Deutsche Bank announced in early 2012 that it was suspending the introduction of new agricultural commodity-based financial investments while it investigated whether this type of investment contributed to food price volatility. Several other European banks also suspended trading in 2012. And Barclays, another target of the campaign, featured in a recent WDM spoof video that implied that the bank profited from hunger, said last November that it was reviewing whether to suspend its agricultural commodities investments as well.

But while the banks initially appeared to take the critiques seriously, the pendulum appears to be swinging back in the other direction in recent weeks. Just last month, Deutsche Bank announced that after an extensive review of the literature on agricultural commodity speculation, it was reinstating its agricultural commodity investments. A Question and Answer page on its website states that the Bank found “no convincing evidence” that financial speculation in agricultural commodity markets has driven up food prices or made them more volatile. It stressed that agricultural derivatives markets play a crucial role for both farmers and processors who need to hedge their risks.

At almost the same time that Deutsche Bank announced its decision to get back into the agricultural derivatives markets, the International Swaps and Derivatives Association (ISDA) launched a new website: CommodityFACT.org. ISDA is a financial lobby group that seeks to be a ‘voice for the global derivatives marketplace’, with over 800 members, including large investment banks that deal in agricultural commodities derivatives such as Goldman, Morgan Stanley, Barclays and Deutsche Bank, to name but a few.

The new website presents itself as a neutral public education tool, with cute pictures of cows, tomatoes and a stalk of wheat with a farm setting as the background. But it clearly speaks for the interests of the banks. It features a selective use of quotes (from a narrow range of sources) that question the role of speculation in generating higher and more volatile food prices. Like Deutsche Bank’s justification for resuming its activity in these markets, the website also makes the case that commodity derivatives are necessary components of smoothly functioning agriculture and food markets. And it argues that regulatory rules, such as position limits called for in the 2010 Dodd-Frank Financial Reform Act, are unwarranted.

ISDA is hardly a neutral body on this issue and its newly launched website is presumably an attempt to shape public discourse around agricultural commodity derivatives. Just over a year ago, ISDA launched a lawsuit against the US Commodity Futures Trading Commission (CFTC), asserting that the latter had not proven that position limits were necessary or appropriate. The court sided with ISDA, and this ruling has stalled implementation of position limits as called for by the Dodd-Frank Act. The ruling was appealed by CFTC and is still in the courts.

Both Deutsche Bank and ISDA cite various studies to make their case. But they both also ignore a number of other studies that stress how increased agricultural commodity derivatives trading in the past decade has deeply affected commodity prices. A recent UNCTAD study, for example, points out that the financialization of commodity markets “…is a serious concern, because the activities of financial participants tend to drive commodity prices away from levels justified by market fundamentals, with negative effects on producers and consumers.”

The Bank for International Settlements noted in its 2010-11 annual report that “while traditional demand and supply factors continue to matter for commodity prices, there is growing evidence that price formation and dynamics in commodity futures markets increasingly display patterns familiar from traditional markets for financial assets – including swings in investor risk aversion and episodes of herding behaviour.”

The banks also fail to mention several important academic studies, including a recent paper by scholars at the London Business School and a 2011 paper by researchers at the New England Complex Systems Institute. Both these studies present sophisticated models that tease out the different factors that have affected commodity price volatility, and both point to financial speculation as a significant force.

The banks’ selective use of studies appears to be part of a broader counter-attack against their critics, and against the recent efforts to tighten regulation over agricultural commodity derivatives markets from which they profit handsomely.

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