By Jennifer Clapp, Professor in the Environment and Resource Studies Department and CIGI Chair in Global Environmental Governance, Balsillie School of International Affairs, University of Waterloo, Canada. Cross posted from Triple Crisis
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.
Does it really matter here, considering that the Banks have gotten away with bringing the world economy to its knees, without any repercussions, aside from bad P.R./a slap on the wrist, then continuing to engage in the practice of manipulating the market[s]?
It is understandable to give up hope in the face of a late capitalism destroyed world. But the introduction to the article clearly states that pressure on banks has caused some to cease speculation in agricultural commodities. so the answer to your question is, “yes it really matters here.”
many thanks Yves…the links Prof Clapp incorporates are very helpful. research is difficult when firms like Glencore make & dominate markets
i covered some of this trading and its bubble effects here
“By betting on price developments for agricultural commodities, investment banks are driving up food prices. They are accessories to the world’s famine crisis,” the German-based NGO, Foodwatch, says on its website. “And because the banks are using the money that we invest in life insurance policies and pension funds to gamble in this global commodities casino, it’s a problem that implicates all of us,” the campaign group said. But the tide of public opinion is turning. And in face of growing pressure, Germany’s second-biggest bank Commerzbank, regional banks LBBW and LBB and the savings bank DekaBank have all announced in recent months that they are pulling out of agricultural commodities trading and ceasing to offer such investment vehicles to their customers.
The Independent: “Private companies like Glencore are playing a game that will make them enormous profits.”
Ms Calpe said leading international politicians and banks expecting Glencore to back away from trading in potential starvation and hunger in developing nations for “ethical reasons” would be disappointed.
“This won’t happen,” she said. “So now is the time to change the rules and regulations about how Glencore and other multinationals such as ADM and Monsanto operate. They know this and have been lobbying heavily around the world to water down and halt any reform.”
Glencore announced pre-tax global profits of £1.4bn. The G20 is considering holding an emergency summit on the world food crisis.
Oxfam was scathing about Glencore’s exploitation of volatile world food prices. Jodie Thorpe, from the aid agency’s Grow Campaign, said: “Glencore’s comment that ‘high prices and lots of volatility and dislocation’ was ‘good’ gives us a rare glimpse into the little-known world of companies that dominate the global food system.”
A Glencore spokesperson said: “Regardless of the business environment, Glencore is helping fulfill global demand by getting the commodities that are needed to the places that need them most.” (my ass! truth: their fucking pockets)
The needs of the few to earn the most outway the needs of the many to reasonably priced food. Free Markets!
If there actually are material reasons for the ISDA to claim that the services of their members reduces price volatility in agricultural markets, or any markets, then those reasons and those claims need to be examined. The information will certainly be obfuscated and the courts bamboozled because we’re dealing with the big banks here, but the results of their enterprise are exposing them. So the CFTC has hard evidence to the contrary, and should use it. Go after the ISDA as an immoral institution promoting a harmful monopoly that does nothing but speculate for its own gain. Shut them down and shut down all but a restricted trade in futures, a very restricted trade, which can be proven to lessen volatility.
i completely agree Susan but financial industries (globally) won’t allow investigations based on privacy laws and copy rights of their trading ‘instruments’ (derivative black boxes)
Some friends in Florida rang this week to say that they finally managed to get the keys for a fore-closed house they successfully bid on despite much aggravation with the bank owning the property. This house has had more than halved in value from its peak price in 2008 according to the county real-estate valuation.
One can only conclude that establishing value through the working of marketplace processes has now become highly contingent on the amount of pumping of unrestrained money created by the private banks and also channeled from investment funds jumping on the band wagon and this too can affect commodities such as food especially when bundled for securitisation processes. It seems not unreasonable to argue that these processes are now a major form of social predation and human societies will be the worse for not stepping in and stopping it.
The idea that the prices of real assets subjected to derivative speculation are a function of supply and demand for the underlying is complete nonsense. Rather, it is the momentum of speculative pools that determines these prices, and this is true not only of commodities but of stocks as well.
An avalanche of bank credit has created a fantasyland of speculative prices, and the tail wags the dog in all markets. This is why investors who seek information in financial reports and from media analysts always end up with the wrong end of the stick. Forget all the talk and watch the prices, if you want to understand where they are heading.
What happens is that prices keep going up and up and up, until lenders get frightened and withdraw credit from the market, at which time they crash.
I often find myself wondering why I’m not reading your blog and simply finding fault with your analysis. Good stuff!
Thanks, but I can’t afford the salary cut.
See Ben Bernanke’s QE/Lsap affect of food and fuel prices. Since QE began the top 1% have garnered 121% of wealth/wage gains. They have so much money that trillions of leveraged dollars speculating on food/fuel prices is akin to a little old ladies $20 a week mad money saved for bingo.
Clinton gave the keys to the US Treasury to that snake Rubin which laid the groundwork for the financial crisis and this evil ramping up of food prices via the CFMA.
This behavior from the elites like the Bernankes and Rubins will not end by its own volition, but god dammit it will end
here’s a chart from 09 to 2011 correlating fed purchasing & commodities
Banks don’t understand the basic fact about “monopoly”. When one player gets all of the money, the game is not over. The game starts again, after the one with all of the money is divested of his wealth. That process is generally called a revolution.
No, this won’t end or at least not well. Courts are increasingly as corrupt as politicians. More so; what protects them from external abuse also protects them from internal restraint.
Right now, we have verdict-less trials for the powerful and trial-less verdicts for the weak.
When and to the degree bankers and other elites are once again subject to a rule of law intended to protect the whole, prices will come down and legislation and a host of other bizarre phenomena, including extreme media propaganda, will quite suddenly become less Alice In Wonderland like. But that may happen too slowly, or it may simply not happen at all. Or not without all hell to pay first. Whichever way, speaking of hell, the little guy will suffer most.
Rather than implying that all speculators are bad (mmkay), I hope we would acknowledge that there are insidious underlying factors which commodity speculative markets enable and amplify.
* a justice system that ignores privileged cheaters
* a monetary system that tremendously distorts interest rates
* existing concentrations of ill-gotten capital
As a left-libertarian, I contend that these underlying factors have little to do with free markets and a lot to do with Capitalism and furthering the interests of the privileged.
you cant separate “free markets” from “capitalism”. Not in the real world, the actual world we all live in, rather than the breathy realm of libertarian concepts.All of your examples ARE AN INTENDED PRODUCT of freemarket capitalism. The justice system does not “ignore priveliged cheaters” it ACTIVELY SERVES THIER EVEY INTEREST. The monetary system wich “distorts interest rates” is directly controlled by the arbiters of the interests of freemarket capitalists.”Existing concentrations of ill gotten capital” are the WHOLE POINT!! “capital” , surplus value stolen from workers (and consumers),is itself ill gotten
“Not in the real world, the actual world we all live in, rather than the breathy realm of libertarian concepts.”
I think we have to understand that the “free market” functioned historically as a kind of theory of economic democracy, one that aligns with the idea of “equality of opportunity,” as opposed to the equality that one might associate with “equality of outcome,”– a principle that almost no one in historically capitalist countries holds, however meddlesome they may be willing to see their government become.
Just look at the minimum wage “‘job guarantee buffer stock’ reserve army of labor” for evidence of that. It’s a meddlesome government policy alright, but those who are pimping it around town–for other people and other peoples’ kids– clearly don’t give a rat’s ass about equality of outcomes.
On the other hand, it seems no more ridiculous to contend one can create a “free market” in which people can compete on a level playing field than it seems possible to me to create something one can call “equality of opportunity.”
But pro-government liberals do contend that equality of opportunity is a thing to be striven for and I imagine that their other half will to continue to do the same with reference to the free market.
To me, they are two sides of the same coin. Equality of opportunity is the story we tell to and for children and the free market is what they get when they grow up.
I do think there are some things that one can do to “level the playing field” in child development, but ultimately one can only do so much before the “breathy realm of liberal concepts” has to take over, deus ex machina fashion, to save the day for liberal ideology.
Another way of looking at it is that liberals train people to think in terms of equality of opportunity and then they turn around and get mad when they discover their pupils actually took the train.
After a whole lifetime of this many people on both sides of the coin are reasonably loathe to give this story up. For one thing, there is no alternative on offer that they would or should actually want.
An emensely charming friend who began life poor and is now quite rich counters every argument with ‘everyone has a chance’. He chanced to be an All America high school football player who went to college on a scholarship, studied engineering, became the biggest home builder in a large southern city, and has never employed anybody, working only with selected contractors.
Capitalism works well for those who develop the right skill set, which generally includes an ability to get money from bankers. You also need great timing and some luck.
We don’t read enough about the other builders who went broke, but this one story is absolutely true, unbelievable as it sounds, even to me.
IMHO, the real systemic problem is the nonstop creation of casualties, without whom those opportunities for the select could not exist. Yet, it remains these entrepreneurial geniuses who create what civilization we have. Imagine what kind of productive process would have developed over the past 200 years under the control of worker committees.
No one who “pulls her/himself up by their bootstraps” succeeds on their own merit. All bootstraps are inherited from ill gotten gains at some point if we go far enough back. A few get great bootstraps from over privilege. Capitalism is designed to maintain/increase these bootstraps for the few. Others get little or no bootstraps at all. Those who are over privileged inherit large bootstraps (nutrition, education, connections, etc.)- far more important than talent or luck. Rather, we should ask, for those of over privilege who manage to fail in a system designed for them, how did that happen?
JEEZIS im sick of these malevolent global finance entities..They’re like STINK..they permeate everything and theres no getting away from it.
There is a reason Greed is listed as one of the seven deadly sins IMO, and it is not just about those who are on the receiving end of rising prices for food and energy.
It has become evident that individuals working at and for large financial and corporate organizations are going to continue to run the table with OPM (“Other People’s Money”) issued by their Fed and distributed first to themselves, the Primary Dealers, as long as they have the opportunity to do so. Their personal financial rewards for continuing their speculations and market manipulations far outweigh any ethical or broader social or economic considerations in their minds. There is no risk to them from losing money in such speculations in their view, only a low risk possibility of job loss.
As a result of their very limited personal risk, their behavior is unlikely to change until their speculations trigger another set of events that threaten or actually cause the collapse of the financial system. This will happen IMO, but I personally believe it is more likely to occur in the CDS (Credit Default Swaps), IRS (Interest Rate Swaps), or Forex derivatives markets than in their speculation in food commodities or energy derivatives, or in precious metals. (Think about JPMorgan’s “London Whale” as the template.)
However, this set of events will likely occur IMO, both because they make mistakes and because of the intentionally networked structure of the financial system they have designed in an effort to keep the status quo intact into perpetuity. This is a very fragile system.
We need to protect ourselves from their behavior, but they have made that very difficult to do. If we have been able to accumulate resources at all, we have been presented with a stark choice of being stripped of our resources either gradually (through QE-ZIRP) accompanied by the related rising price of necessities, or quickly through their control and manipulation of money and the financial markets.
They seem to think that placing their assets in perceived “safe havens” will shield themselves from the after-effects of their behavior. Sadly for all of us, I believe they will find that view to be in error.
The financialization of food commodities by the banking sector should be seen as a cancer that needs to be removed. Next for consideration will probably be the global human organ donations sector since humans will pay the price. In the case of Dick Cheney, Halliburton is probably involved.
many and then few humans will survive the food rounds but when they heighten the financialization leading to speculation of water…we’ll be done, quickly
Another ruse to watch for is “Cap and Trade”. Chile recently legislated “Cap & Trade” fishing. A preview of “market solutions” to the environment?
Did anyone seriously think that the looters were meekly going to stop their looting?
I first became aware of and began writing about excess speculation in oil markets back in 2007. Such speculation had been going on in oil markets since 2004. And while there was a back off after the massive 2008 spike, since 2011, excess speculation in oil has returned with a vengeance.
Let me say that speculation and intermediation by traders is the essence of a commodities market, the result of such speculation normally is “price discovery”, but since the entry into commodities markets of the big investment banks what has been going on is price manipulation, the very opposite of price discovery.
This pattern of pushing speculation hard, then falling back when the political and popular backlash shows signs of causing a substantial reaction, followed by a new speculative binge once the heat has subsided appears to be a common feature of both oil and ag markets.
Finally, as I try to point out as often as I can, kleptocracy involves great violence. It is not just people gambling with other people’s money before computer terminals. Kleptocracy kills. It kills those who can not afford its artificially jacked up prices. It harms those who have to cut back, go to bed hungry, or go into debt. Those who steal and murder from the comfort of their offices and computer screens are still thieves and murderers. We should never forget this, ever.
“We” indeed! Nevermind the millions “we’ve” killed in the process. American Capitalists – aka “We” – are just “SO” full of shit, aren’t “WE?”
Time to start owning up to crimes against to ours (aka “humanity”) me thinks.
http://necsi.edu/research/social/food_prices.pdf is very convincing and demands urgent action on both speculation and ‘growing ethanol’. The banks have long been involved in monopoly scams like this – Barings in the 18th century on cochineal (then a vital commodity in tanning) would head a long list. Much of this monopoly manipulation is run through exchange traded funds (ETFs) – copper is a particular target. We need to break up the whole transacting mess – some ideas athttp://wer.worldeconomicsassociation.org/article/view/56 but it’s sadly even more complex than those of us who want fair trading suspect. Are the banks buying these monopoly interests with our money?
your spot on regarding ETF’s. i first learned when UPS showed up (temporarily) in 2 different funds after dipping into the TARP jar. today the makeup of the funds are jostled faster and without discretion. retailers pumping long term investors into ETF’s need to be tarred n feathered…then hung by their eyelashes. my opinion, of course.
The statement by the banksters that futures are needed,sothat farmers can realize income stability, is not true,altho that argument goes way back.Futures can only stabilize prices and hence income when a person both buys and sells a product(or its derivatives).The most obvious and clearest winners are grain elevator companies,that buy from farmers and sll toflour mills,soybeen crushers,etc.As frequent,yearround buyers and sellers,they are in a position position to use the futures market to lock in a position to lock in their margin at least.So can crushers,as they can lock in margins by selling soybeenoil and meal futures whenever they buy beans.The farmer’s situation is very different in several respects:he only gets ons crop a year,all at once in the fall,about 100 days after he seeded.Onless he has storage,he must sell his crop then,when prices are seasonally lowest,typically.If he tried to use futures to cover his cash cost at seeding(seed, fertilizerweedkiller,fungicides,oil and gas) he could watch the market and sell his expected crop if futures were to rise high enough to allow him to lock in a price that would be adequate.If prices did not get high enough,the futures market would be useless to him.By the way this situation is equally true of the”oil and gas’producers,even the biggest ones.While they do use futures ,they are simply gambling,altho as insiders they are likely to be better informed about market conditions,but if you look at their yrly financial reports you will find huge ‘hedging profits and losses.hope this helps.