Speculating over the price of food is one of the main reasons for food price volatility.
The usual culprits behind rising food prices would be bad weather and a poor harvest. But, of late, the reason for the rise in food prices is being attributed to speculation over the price of food by traders.
The same banks and traders who were responsible for the sub- prime mortgage crisis are responsible for this too. Not only are they driving the food prices up- consequently making billions out of it- they are also causing misery to those poor who cannot afford to buy food now.
This is all a result of the deregulation of the market in the mid 90s, when hedging of food commodities was abolished. 'Hedging' is a term used for the practice by a farmer of selling his crops in advance. Farmers usually did this to protect themselves from the usual risks. This worked well, until the regulations were done away with.
Food commodities then became 'derivatives' which could be bought and sold among traders, who had nothing to do with agriculture. This trend reached a peak particularly during the mortgage crisis, when food commodities were considered to be safe investments.
In a recent debate at the United Nations FAO (Food and Agriculture Organisation) headquarters in Rome, a panel of international experts in trades, commodities and agriculture spoke on the topic of food speculation. It also featured Leonel Fernández Reyna, President of the Dominican Republic, who has been instrumental in bringing speculation on food price to the attention of the FAO.
According to him, food prices were having a "tremendous human impact". He also cautioned against using food commodities purely as financial instrument, as they have a big impact on net importers of food, and have the ability to destabilize governments.
He believes that this is a problem which can be solved only with transparency, efficiency and the spirit of solidarity.
But, that might be easier said than done. Mike Maters, fund manager at Masters Capital Management believes that 70 to 80 percent of the business involving food commodities is speculative. And as all Wall Street fads, this one might end very badly too.
As Deborah Doane, director of the World Development Movement aptly puts it, people are dying from hunger, but the banks are making a killing from speculating over food price.
