Are Pensions Gambling On Hunger?

Lesley Lanir writes in Digital Journal, Gambling banks, hedge and pension funds spike global food prices:
The World Development Movement blames banks, hedge and pension funds for betting and gambling on food commodities and forcing the price of basic food items to soar causing global hunger and poverty to increase.

The World Development Movement blames the unprecedented 10% rise in staples on the banks, hedge funds and pension funds that bet on food prices in financial markets, causing price highs and lows in staple foods such as wheat, maize and soy granting them huge profits but at the same time causing hunger and poverty for millions around the world. They state as an example that In the last six months of 2010 alone, more than 44 million people were driven into extreme poverty as a result of rising food prices.

The World Development Movement quote Michel Barnier, European commissioner for the internal market as saying:
Speculation in basic foodstuffs is a scandal when there are a billion starving people in the world. We must ensure markets contribute to sustainable growth. I am fighting for a fairer world and I want Europe to take the lead on that.
World Bank records show that worldwide food prices reached an all-time high in July. Droughts and high temperatures caused disappointing US and Eastern European harvests forcing the average worldwide cost of basic food items to spike 10 per cent in a month. The news report states that "from June to July, maize and wheat rose by 25 percent each and soybeans by 17 percent".

Although, clearly, adverse weather conditions do affect harvests and food prices as do geopolitics, The World Development Movement report, July 2010, The Great Hunger Lottery - How banking speculation causes food crises presents the argument of how financial speculation and derivatives trading on food commodities, although lucrative for some, affect global food prices by causing price spiking which leads to unaffordable food prices for low-income families especially in developing countries relying on food imports.

As stated, the report's basic message is:

Allowing gambling on hunger in financial markets is dangerous, immoral and indefensible. And it needs to be stopped before any more people suffer to satisfy the greed of the banks.

In a more succinct message Stop Gambling on Hunger says: Wall Street is gambling on the world’s food supply. One bank the WDM refer to in particular is the UK bank Barclays who they estimate make around £340m yearly from "food speculative activities".

A later report from the WDM Broken markets - How financial market regulation can help prevent another global food crisis September 2011 argues and presents:
  • How trading reforms are urgently required in order to stop a global food price crisis driving millions more into hunger and poverty.
  • How financial speculation has boomed, turning commodity derivatives into just another asset class for investors.
  • How the latter distorts and destabilises the proper functioning of agricultural markets.
  • How changes in the financial markets affect the price of food, and the negative impact this has on the world’s poorest people.
For more information on this subject:

Word Bank Food Price Watch

Stop Gambling on Hunger

How institutional investors are driving up food and energy prices

On Saturday, the Independent blasted Barclays, accusing them of making £500m betting on food crisis:

Barclays has made as much as half a billion pounds in two years from speculating on food staples such as wheat and soya, prompting allegations that banks are profiting handsomely from the global food crisis.

Barclays is the UK bank with the greatest involvement in food commodity trading and is one of the three biggest global players, along with the US banking giants Goldman Sachs and Morgan Stanley, research from the World Development Movement points out.

Last week the trading giant Glencore was attacked for describing the global food crisis and price rises as a "good" business opportunity.

The extent of Barclays' involvement in food speculation comes to light as new figures from the World Bank show that global food prices hit an all-time high in July, with poor harvests in the US and Russia pushing up the average worldwide cost of staples by an unprecedented 10 per cent in a month.

The extent of just one bank's involvement in agricultural markets will add to concerns that food speculation could help push basic prices so high that they trigger a wave of riots in the world's poorest countries, as staples drift out of their populations' reach.

Nor has the UK escaped rising food costs. Shop food prices have risen, on average, by 37.9 per cent in the past seven years, according to the Office for National Statistics, as the demands of an increasingly affluent and growing world population strain supply. Oils and fats have soared by 63 per cent in the UK during that period, fish prices by 50.9 per cent, bread and cereals by 36.7 per cent, meat 34.5 per cent and vegetables 41.3 per cent. In April, average UK food prices were 4.2 per cent higher than a year earlier.

Oxfam's private sector adviser, Rob Nash, said: "The food market is becoming a playground for investors rather than a market place for farmers. The trend of big investors betting on food prices is transforming food into a financial asset while exacerbating the risk of price spikes that hit the poor hardest."

The World Development Movement report estimates that Barclays made as much as £529m from its "food speculative activities" in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.

The revenues that Barclays and other banks make from trading in everything from wheat and corn to coffee and cocoa, are expected to increase this year, with prices once again on the rise. Corn prices have risen by 45 per cent since the start of June, with wheat jumping by 30 per cent.

Barclays makes most of its "food-speculation" revenues by setting up and managing commodity funds that invest money from pension funds, insurance companies and wealthy individuals in a variety of agricultural products in return for fees and commissions. The bank claims not to invest its own money in such commodities.

Since deregulation allowed the creation of such funds in 2000, institutions such as Barclays have collectively channelled an astonishing $200bn (£126bn) of investment cash into agricultural commodities, according to the US Commodity Futures Trading Commission.

Barclays' dominance in commodities trading is thanks to its former chief executive Bob Diamond, who was Britain's best-paid banking boss until he was forced to resign last month following a £290m fine for attempting to manipulate the Liborinterest rate. As boss of Barclays Capital he boosted trading in agricultural products.

Dealing with the reputational headache associated with high levels of food speculation will be yet another item in the already-bulging in-tray of Antony Jenkins, who was promoted to become Mr Diamond's replacement on Thursday.

Christine Haigh, policy and campaigns officer at the World Development Movement and one of the analysts behind the research, said: "No doubt the UK's biggest player in the commodities markets is hoping it will do better this year by cashing in on rising food prices. "Its behaviour risks fuelling a speculative bubble and contributing to hunger and poverty for millions of the world's poorest people."

Banks and hedge funds typically argue that speculation makes little or no difference to food prices and volatility and argue, correctly, that no definitive link has been proved. Barclays declined to comment on the amount of money it makes from trading in agricultural commodities yesterday.

The bank defended its actions, pointing out that trading in so-called futures contracts – an agreement to buy or sell a certain quantity of a product, at a given price on an agreed date – helped parties such as farmers and bakers to hedge against the risk of rising or falling prices. "Our clients include investment companies, food producers and consumers who, among other things, seek our help to manage risks."

Barclays also declined to comment on whether it thought large amounts of speculation pushed up prices and volatility. A spokesman said: "We recognise there is a perception held by some stakeholders that participation in agricultural futures markets by some participants can unduly influence the prices of commodities. As a result, we continue to carefully monitor market trends and any research produced on this subject," a spokesman said."

Barclays Capital analysts admitted in a note to clients in February that speculation did push up prices. Barclays said: "The second key driver is that commodity investors have begun allocating to commodities again after beginning 2012 heavily underexposed to the sector." The other drivers were the "health of the global economy" and "weather and geopolitics".

There is no denying that extreme weather, rising demand from emerging markets and geopolitics are influencing food prices, but Barclays is full of it when it claims that commodity funds don't play a role too.

In 2005, I went to a commodity conference in London hosted by Barclays. Leading global pension funds like the Dutch ABP and PGGM were all in attendance. Commodities was the "new, hot asset class" with wild promises that a nice allocation in this space will help mitigate downside risk in a pension portfolio.

Back then, I was struck by how some commodity indexes were nothing more than a play on oil futures. For example, the Goldman Sachs Commodity Index (GSCI) was made up of 76% energy futures. It simply didn't make sense for a Canadian pension fund, already investing heavily in commodity shares, to allocate to such a long-only index.

Other indexes were more diversified, investing in metals, energy and soft commodities like corn, wheat, cocoa, and sugar. Still, as I've already covered in this blog, savvy investors are shunning these indexes, wisely investing in active commodities strategies.

But as more and more pension funds invest in active commodity funds, these flows are causing wild gyrations in many commodity prices. It's not just "hedging for farmers" as Barclays claims, there is a great deal of speculation going on.

Go back to read Mike Masters' testimony before the Commodities Futures Trading Commission, delivered in August, 2009. Click here to read it. Masters was discussing how speculation influences crude oil prices. I quote the following:
Wall Street banks, including Citigroup, J.P. Morgan, Goldman Sachs, Deutsche Bank, Lehman Brothers, Barclays, Merrill Lynch, Oppenheimer and others have issued research reports from their analysts citing the influence of Index Speculators and/or traditional speculators on energy prices. It would be wrong to characterize excessive speculation in the energy markets as an “open secret” on Wall Street because it is not even a secret any more. I spoke at a hedge fund managers’ conference late last year and there was nearly unanimous consensus that the crude oil market had just experienced a speculative bubble.

If the CFTC does not act to place speculative position limits on the energy derivatives markets, then bona fide physical hedgers will abandon these markets in ever increasing numbers. They will choose not to hedge at all rather than participate in a market where prices reflect speculator sentiment, index money flows, and capital market notions (like currency levels), and are un-tethered from the true supply and demand of the underlying physical commodity.

I also need to address the completely fallacious “liquidity argument” put forward by the exchanges and the swaps dealers. Excessive speculation leads to excessive volume and excessive volatility. Senator Harkin recently said, “you need an aspirin a day but you don’t need a whole bottle.” Clearly we need sufficient liquidity from speculators for the markets to function properly. However, too much speculative liquidity, just like too much aspirin, is very destructive.
Masters has repeatedly warned of the damaging effects of active and passive commodities investing, stating: "It is of critical importance to understand that all speculators, both passive and active, can and do affect commodities prices."

To think that all these pension flows chasing higher yields in the commodities space don't influence the underlying price of commodities is sheer folly. As more and more money enters the space, we will see ever wilder gyrations of commodity prices, but big banks will vigorously deny any wrongdoing.

Below, food prices are on the rise again - increasing 8 percent in the first months of 2012 - after a period of decline, according to the World Bank's Food Price Watch. Chief Economist Jose Cuesta says the price of food has increased across the globe and is due to higher oil prices, adverse weather conditions, and Asia's strong demand for food imports.

And Mike Masters, founder of Masters Capital Management, talks about the impact of market speculation on oil prices. Masters speaks on Bloomberg Television's "In Business with Margaret Brennan." Interview is from June 2011 but listen to his points on the collective actions of investors.