15 September 2012

Why food prices are fluctuating wildly

Don’t blame the physical markets: financialization is the root cause of oil and commodity price volatility. An article by the United Nations Conference on Trade and Development on how commodity speculators have distorted and taken over food prices.

The sharp price movements of many primary commodities, including oil, have fuelled intense debate about the causes of the price hikes and possible remedies. Growing demand from large developing economies and frequent supply shocks, such as adverse weather and export bans, are generally accepted as more tangible factors that explain volatility, rather than the hundreds of billions of dollars of bets placed on expectations of temporarily rising prices. Despite a growing body of evidence on the destabilizing influences emanating from financial markets, the “real economy” explanations still dominate the debate.

It is not commonly recognized that demand from financial investors in the commodity markets has become overwhelming during the last decade. Of course, supply and demand shocks can still move commodity prices time and again. But with the volumes of exchange-traded derivatives on commodity markets now being 20 to 30 times larger than physical production, the influence of financial markets has systematically transformed these real markets into financial markets. This calls for strong and prompt policy and regulatory responses in the financial markets, rather than in the physical markets.

Read more here on the UNCTAD website.