Sasha Breger Bush, Guest Blogger
Over the past several years it has become increasingly clear that derivatives markets and instruments have played a large role in the global food crisis. Masters and White, Ghosh, Wise and, most recently, a paper co-authored by the World Bank, IMF, UNCTAD, and FAO (among other agencies), have all pointed to the role of speculative commodity index trading in aggravating the food price crisis in 2007-8 – perhaps by as much as 20% - as well as the run-up in global food prices in 2011.
Derivatives markets and instruments are thus implicated as levers of inequality, as food price volatility does not affect all people in the same way. Indeed, in the presence of food price risk, the poor tend to suffer disproportionately. Food purchases are generally a greater proportion of one’s income the lower that income is, meaning that food price increases have a disproportionately negative effect on low income people and households. Food price shocks often lead poorer individuals and families to coping strategies that ensure adequate food in the short-term but have longer-term costs, such as pulling kids out of school or liquidating hard assets. Those with higher incomes, more assets or access to credit do not face the same vulnerabilities. This generates inequalities on a global scale, especially as food price volatility becomes a more permanent feature of the global economic landscape.
The role of derivatives in generating inequality through the food and agricultural sectors does not stop there. Derivatives market globalization, in addition to providing new opportunities for speculators, has altered the development policy calculus about how to best manage commodity price risk at the sectoral and national levels. In other words, while in the above context we see inequality arising from speculators’ use of poorly regulated derivative instruments to profit, in this context we see inequality arising from policymakers’ increasing reliance on derivatives as tools of social policy (though the two dynamics are certainly related).
As I detail in my recent book, for over two decades mainstream development agencies have been recommending that derivatives markets substitute for the government-centered commodity risk management schemes that dominated the post-Depression policy environment. Rather than employing international commodity agreements, supply management schemes, buffer stocks, trade restraints and other tools for direct price manipulation (tools that were used extensively across the global North and South between the 1930s and 1980s), governments can instead support global commodity derivatives exchanges, encourage the establishment of local derivatives exchanges, and support individual, firm and governmental use of derivatives to mitigate the financial costs of agricultural price volatility. Whether you are a farmer, cooperative, intermediate processor, exporter, importer, international trader, final processor, distributor, consumer or commodity-dependent government, derivatives markets offer opportunities for market risk management that can and should supplant the older, state-centered mechanisms.
There is good reason to think that the integration of derivatives markets into agricultural and social policy is producing social and economic inequalities of various types. Even on the surface, social policy agendas that rely on financial innovation and financial market expansion for their success will empower finance relative to other parts of the economy (a process called “financialization” in the literature, with large implications for the social distribution of wealth and power). In the development context, mainstream development agencies have been agents of financial sector empowerment in agriculture, promoting the products and services of mostly foreign, private financial firms to the governments, farmers, and consumers of a great many countries. Just to give a few examples, the World Bank has partnered with JP Morgan to offer commodity derivatives to farmers and agriculture firms in the developing world. UNCTAD has partnered with a prominent industry association, the Swiss Futures and Options Association to promote local commodity exchanges across the global South.
Exploring the matter of inequality more deeply: not all agricultural players are equally capable of effectively using derivative instruments. Certain actors are better equipped to trade and others are not. In the coffee case (which informs my discussion in the book), international coffee traders are typically very adept derivatives users, while smallholder coffee farmers are significantly less so on average. A variety of factors undermine the efficacy of futures and options trading for smallholders, e.g., small lot sizes, considerable yield risk, the relatively high cost of trading, the information requirements of trading and the technical capacity of traders. In many cases, wealthier and more powerful coffee actors (like exporters, traders and processors) have advantages in the context of derivatives usage: for example large and more stable lot sizes, and economies of scale in trading and information costs. Not to mention the fact that when the markets themselves work poorly (market inefficiencies are frequent and to some extent related to the increasing speculation noted above), smaller and poorer traders are least able to bear the costs of the margin calls and inadequate insurance that result.
For policymakers, this speaks to the need to think about other commodity price risk management options—options that can be of service to those who need support most, options that work to support equity rather than inequality, options that cease empowering the financial sector and the corporate giants that populate it. There are many alternatives: supply management, buffer stock schemes, producer and consumer unionization, re-localization and diversification of food systems, and ethical trading schemes like Fairtrade, just to name a few.
If smallholder coffee farmers have other risk management options, or if prices are relatively stable, unequal derivatives capabilities may be inconsequential. Yet, in an environment of increasing price volatility, policymaker aversion to public risk management schemes and inadequate informal risk management arrangements at the local and community level (due to local and family stressors as well as large-scale social changes like urbanization, cross-border migration and climate change),uneven access to derivatives markets is highly consequential.
Sasha Breger Bush is Lecturer for the BA Program at the Josef Korbel School of International Studies at the University of Denver.
Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.