Just when you thought the unhealthy ties between food, fuel, and financial markets couldn’t get more perverse, we get the announcement that Vitol, the world’s largest independent oil trader, is entering the grain-trading business, hiring a team from Viterra, based in Toronto, to run the show. And lest we toss this off as just another corporate deal, Javier Blas in the Financial Times reminds us that Viterra has itself recently been bought by Glencore, perhaps the world’s greatest global commodity speculator.
What could go wrong?
For the world’s poor, plenty. They’ve already endured three food price spikes in the last six years, fueled in part by financial speculators gambling on agricultural, energy, and metals commodities as they fled the wreckage of the housing and stock market crashes. This corporate deal may not change a thing, but it is a powerful symbol of what’s wrong with our broken food system.
Why are development institutions so supportive of the derivatives industry? Given what we now know about derivative instruments and markets—they are complex, volatile, poorly regulated, crisis-prone, and dominated by very large financial firms—the alliance between prominent global development agencies like the World Bank and UNCTAD and the derivatives industry gives real reason for concern. In fact, this appears to be yet another instance in which the interests of the development establishment seem grossly misaligned relative to the goals of the constituencies they purport serve.
As I detail in my recent book on the topic, the governments of commodity dependent economies, agricultural firms involved in commodity trading and processing, and even small farmers have been targeted by these two institutions as actors who stand to benefit from more derivatives trading and the expansion of derivative markets across the developing world. The basic argument is that the welfare of these actors depends critically on prices in global commodities markets. By using derivatives to manage the risk of price fluctuation, tax and export revenues, business revenues and personal incomes could be stabilized and even raised in some cases.
To this end, UNCTAD has been recommending the establishment of local commodity exchanges in a variety of developing countries, exchanges that can both facilitate spot exchanges as well as provide opportunities for forward contracting, and futures and options trading. Similarly, though with a slightly different orientation, the World Bank has been recommending that various developing country parties (public and private) trade on global derivatives exchanges (located mostly in the West) in order to mitigate price risk.
The recent growth resurgence in Africa has dominated the news in the media as well as debates in the development community over the past years. This growth resurgence has important features that are distinct from previous growth accelerations, and inspire the optimistic view that, maybe, Africa could be on a path of more sustained growth. A key feature is that, unlike previous growth episodes, recent growth is not just a natural resource story; in particular, it is not just an oil story. Many among the high growers are resource-poor countries whose economies are primarily agriculture-based, such as Ethiopia, Malawi, Rwanda, Uganda and others. Even in the case of oil producers such as Nigeria, agriculture has emerged as a substantial contributor to growth. If Africa is to “conquer the 21st century” it has to rekindle its love for its agriculture.
In the inaugural lecture of the Speaker Series of the African Development Policy program at the Political Economy Research Institute on 22 February 2013, Professor Calestous Juma of Harvard Kennedy School charted a new strategy for Africa’s future based on technology and innovation-driven agricultural development. In his recent book, New Harvest: Agricultural Innovation in Africa, Calestous Juma provides a blue print for an agricultural development strategy based on four pillars: science and technology, infrastructure, technical capacity, and entrepreneurship. But for this strategy to succeed, it needs new institutions to implement the programs, and, most importantly it requires a developmental leadership that can unify the various centers of decision making (e.g., ministries) and mobilize resource allocation around the agriculture development agenda.
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.
Last year international food markets suffered their third price spike in five years. The trigger was a terrible drought in the United States—a major agricultural producer and exporter. An unstable climate met low levels of international grain reserves, while U.S. ethanol gobbled up maize supplies. The resulting high and volatile prices struck yet another blow at the world’s already fragile food systems.
This is exactly the scenario we warned of a year ago when we published “Resolving the Food Crisis,” a comprehensive assessment of the international community’s response to the global food price crisis. High and volatile food prices in international markets will continue until structural reforms to trade, finance and agriculture are put in place to address the real drivers of the food crisis.
In his new collection of essays, James K. Boyce explores the idea that the environment belongs in equal measure to us all; a clean and safe environment is not a commodity to be allocated on the basis of wealth, nor a privilege to be allocated through political power, but rather a basic human right. Building upon this premise, Boyce explores the many ways in which economics can be refashioned into an instrument for advancing human well-being and environmental health. Topics covered include environmental justice, disaster response, globalization and the environment, industrial toxins and other pollutants, cap-and-dividend climate policies, and agricultural biodiversity.
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Foreign aid has been getting a bad press this year – and not without reason. For a long time bilateral aid in particular has been seen as too small and scattered, too politically motivated, too supportive of the interests of donors (especially of the business interests of donor countries) rather than oriented to real benefits for intended recipients. Now, governments of poor developing countries that were earlier grateful for any crumbs from the rich countries’ table are less welcoming, especially of aid that comes tied to various economic and political strings. The improvement in their terms of trade over the past six years, as well as the emergence of new markets and new sources of aid and investment from other emerging nations and oil-exporting countries, have all played a role in this changed perception.
The relationship of the UK government with foreign aid has become particularly complicated in recent times – but it may well be symptomatic of a wider problem in many developing countries. The Cameron government announced that it was going to “ringfence” foreign aid from the sweeping budget cuts that it has already announced or plans to implement over the next few years. But this has come under attack from both Left and Right for various reasons. Revelations in the British media that a significant part of the funds has been directed to highly paid consultants based in the UK whose output is often of dubious relevance or usefulness to the so-called “beneficiary” country or its people may have come as a surprise to many within Britain, but such patterns have been apparent in the developing world for some time now.
As long ago as 1999, I argued that neoliberalism – the Washington Consensus – was cracked and that the development debate would once again open up. Now, after research in the Philippines and after studying the food prices crises of the past four years, I have become convinced that the crisis of food and farming could well be the catalyst for several countries to shift away from free- market policies. At the very least, some countries are shifting from more “vulnerable” to more “rooted” agriculture.
My most recent article on this subject, coauthored with John Cavanagh (director of the Institute for Policy Studies), was recently published in the Journal of Peasant Studies. We point out that a lot of countries have been left vulnerable in agriculture to the cruel batterings of volatile global markets.
For those following the debate on commodity market speculation and its relationship to food price volatility, these are interesting times. Recent months have seen important developments in both the US and the European Union as regulators seek to reform financial markets in a bid to reduce excessive speculation in agricultural commodities. The regulatory outcomes in these jurisdictions will influence whether we end up in a race to the top or a race to the bottom with respect to the rules that govern financial investment in agricultural commodity derivatives.