Inbox: Broken markets driving up food prices

Anew report launched in London has suggested that New Zealand’s economy could be an early casualty of an impending food market crash prompted by irresponsible speculation in food prices. The Broken Markets report, released in Britain by the World Development Movement (www.wdm.org.uk) cautions that volatile food markets expose food-producing economies such as New Zealand to price collapses that are passed down the chain by investment groups.
The scenario Broken Markets asserts is that the current ‘bubble’ characteristic of the global food commodity markets of grain, dairy, meat, sugar, coffee and cocoa is the consequence of similar unregulated speculation by investment organisations to that which triggered the financial crisis of 2008. The problem the report foresees is that when the ‘bubble’ bursts, lack of any real link between prices and market value for food is compounded on price-taking communities at the bottom of the market. That is, the farmers and their national economies.
With New Zealand currently enjoying high commodity prices that have shored up the economy, the report is timely as it coincides with sudden decline in the manufacturing sector’s sales in the June quarter by 0.7 percent. This is in spite of an increase in production of 0.3 percent. Meat and dairy processing represent 30 percent of New Zealand’s manufacturing sector.
The report calls for more regulation of the international food commodity market to limit instability in the market and bring prices back to more accurate reflection of supply and demand dynamics. Increasing involvement in food price speculation by investment groups has led to dislocation between food prices and food supply, the report shows. Wheat, for example, has been at record-high prices for three years, but supply continues to meet demand across the world.
This inflation, the report shows, is due to reversal in the balance of the food trade. Financial speculators made up just 12 percent of food commodity markets in 1996, but are now at 60 percent with total assets of US$126 billion.
Broken Markets’ call for increased regulation of this market is supported by Virgin Group founder Sir Richard Branson, who says: “There is strong evidence that speculation exacerbated the last oil and food bubble. Speculation will fuel the next one too, unless meaningful speculative position limits are established.”
“Regulation of agricultural derivative markets would end the dominance of financial speculators, and make these markets work for the benefit of food producers and consumers throughout the world. Regulators must take this opportunity to act for the benefit of all,” the report concludes. M
– Keith Stewart