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Speculators not culprits behind food inflation, think tank says

There is little evidence to support suspicions that speculators are the culprits behind rising world food prices, a new report argues.

Rather, the fundamental causes are increasing demand in developing countries for protein-based diets, stagnating agricultural productivity, demand from bio-fuels producers and government controls that limit output and trading, the Conference Board of Canada report concludes.

For example, it noted that some governments have reacted to food shortages by putting limits on exports to build up their inventories, or in other words by hoarding food, citing as examples India, Russia and Argentina.

Instead, it urges governments and the global agricultural industry to look at ways to restructure markets to address those causes.

“In recent years, vast sums of money have been pouring into new forms of financial speculation based on food-commodity prices,” observed the think-tank's president, Anne Golden.

The report noted that agricultural commodity prices have soared on average 80 per cent in only three years.

However, the spread of securitization of food commodities can be seen as an effect, rather than a cause, of the rise in world food prices, she said, adding that it's only when prices for underlying commodities are volatile does it become worthwhile for speculators and investors to seek profit in betting on price changes.

“For nearly a 100 years, food-commodity markets have been organized around 'forward' contracts between producers and buyers,” it said. “Over time, a 'futures' market has developed, where contracts can be bought and sold by financial intermediaries, or 'non-commercial' players.”

Most of the non-commercial players, including speculators, trade in the long-term market that reflects expectations of future commodity prices rather than today's prices on the “spot”market, it noted.

But securitization has its benefits, it added.

It establishes a benchmark price as a point of reference for quotations in the marketplace and it allows producers to hedge against risks, which stabilizes farm income, it said.

Producers are protected from falling prices by purchasing futures, it said.

If prices fall, the loss on the sale of the crop is offset by a gain on the futures, while if prices rise, the loss on futures is offset by increased profit on the crop.

“Policy-makers can best help markets, including suppliers and consumers, not by barring these players from participation — but by adjusting the rules that govern their activities,” said Golden.

Source: Vancouver Sun

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