A rough consensus has emerged around the causes of the high food prices that spiraled up in 2007 and 2008; increasing global food demand due to rising incomes and population, stalling agriculture productivity, and biofuels. But one factor that remains hotly debated is the role of financial speculation in food prices.

The amount of food produced and consumed has grown gradually in the last decade, but the amount of investment interest in food commodities has skyrocketed. For the most part, investors and speculators are not actually buying food commodities; they are buying futures contracts and various financial derivatives. Volumes have grown from less than $10 billion to more than $450 billion in a little over a decade. And while commodities markets once were largely composed of speculators who were directly engaged in food industries, financial investors—index funds, hedge funds, etc.—now dominate the markets. The usual explanation of the rapid movement of capital into commodities is that investors were seeking new, safer places to put money now that economic catastrophes have struck dot-coms, the stock market, the housing sector, and even government debt. Commodities, historically, have not been as tied to other economic assets, so are a good hedge; i.e. if the stock market collapses, commodities might not—and vice-versa.

Some analysts argue that this investor rush into commodities has inflated food prices. But the dominant view is that this financial activity on futures contracts and derivatives doesn’t really affect prices directly—that “market fundamentals” of supply and demand are still what determines the price of corn on Chicago Mercantile Exchange.

Part of the challenge is finding a way to test the question. The accelerating financial activity is not in physical hording or dumping of agriculture commodities, but in trading futures contracts and “derivatives” of these contracts—some of them quite exotic, obscure, or unregulated. The analytical tools to measure the impact of speculative activity on prices are not well developed. Attempts to do this have usually found no impact—or found mixed results. But it’s also true that the methods have been flawed—only able to capture parts of the market and activity—and good data is not always available.

Now comes a contribution from researchers at the United Nations Conference on Trade and Development (UNCTAD). They tried to investigate commodities trading at shorter intervals than the standard daily rate (i.e. were prices up or down each day?). Instead, they look at data measuring trades at one second, 10 seconds, 5 minutes, and one-hour. They analysis tells an interesting story, shown in this graph (Source: VoxEU.org):

What it measures is the correlation between commodities futures prices and stock market futures. And what it shows is that starting in 2008, at the height of the food price crisis—and at the moment of the collapse of Lehman Brothers, something changed. Before then, commodities futures and stock market futures had low correlation; close to zero. After that point, they have begun to move together more closely; closer to 1, which would be perfect correlation.

So, what does this tell us?

Well, I’m not totally sure. And this is just one study. And, you could certainly ask whether this tool—measuring the correlation of short-term movements between commodities futures and equities futures—is useful.

But here are some possible implications:

The authors say that “high-frequency trading strategies, in particular the trend-following ones, are playing a key role.” They argue that the “financialization” of commodity markets is impacting price determination—that if prices were set based on supply/demand fundamentals, there shouldn’t be a correlation with equities. Commodity prices should be affected by seasons, weather, demand, etc. not by changes in stock market prices. They find similar correlations over a range of commodities—including non-food commodities. So—they argue—the shifting “financialization” is changing price formation.

They argue that linking commodity markets to financial actors and stock markets in this way means “commodity markets are more and more prone to events in global financial markets and more likely to deviate from their fundamentals.”

The linkage also undermines the purpose of many financial actors in investing in commodities; to hedge against other markets, like the stock market. The idea that they are increasingly correlated will mean that commodities won’t be safe if the stock market crashes.

If true—and if, indeed, caused by the high frequency trading—this might also add the arguments in favor of measures like the financial transaction tax, which could help to mediate or reduce this linkage and risk.

This blog was written by senior policy advisor Stephanie Burgos.

Negotiations around the Obama administration’s major trade initiative, a free trade agreement called the Trans-Pacific Partnership Agreement (TPPA), are underway this week with talks ending in Australia tomorrow. The agreement is highly ambitious— it aims to set out a new trading framework with at least eight countries in Asia and Latin America. Unfortunately, if the US government gets its way, the agreement will be a major setback for millions of people living in poverty—including in three of the developing countries taking part in the negotiations—Peru, Malaysia, and Vietnam.

When Democrats took control of the House of Representatives in 2006, they signaled an end to “business as usual” on trade agreements. A difficult and substantive negotiation with the Bush administration resulted in a new template on the “intellectual property” chapter of trade agreements, and particularly on how this chapter would affect the affordability of medicines within the health care systems of our trading partners. The resulting agreement was called—for lack of something more inspired—the May 10^th deal. The May 10^th deal became the model trade agreement with Peru, Panama, and Colombia, which were eventually enacted by Congress.

Oxfam staff members were consulted on the May 10^th deal and, while we didn’t fully endorse it, we recognized that it was an important improvement over the earlier policies affecting access to medicines that the Bush administration had been pushing through trade agreements.

We had every expectation that the Obama administration would hold to the May 10^th deal, or even improve upon it. Unfortunately, public health advocates (including Oxfam) have been surprised and dismayed that the Obama administration has abandoned the May 10^th deal and seems intent on pursuing policies that will undermine access to affordable medicines for people living in poverty.

Based upon leaks of two US negotiating proposals for the TPPA released last year, it looks like US negotiators are running directly into the arms of the multinational pharmaceutical industry. The US proposals, buried in legal jargon, are an appalling corporate give-away to ’big pharma’ that empower one of this country’s most profitable industries to extend their lucrative monopolies and cripple the ability of governments to negotiate affordable medicine prices. Various legal and procedural rules in the US proposal would impose unaffordable medicine prices on low and middle income countries and obstruct low-cost generics from entering the market when monopolies for branded medicines produced by multinational drug companies expire.

Affordable medicines are critical to the health care of poor people, since most of the poorest pay out-of-pocket. Similar rules imposed on other countries have increased prices. In Jordan, which signed a trade agreement with the US, medicines prices increased by 20 percent overall and by as much as 10 times for key cancer and heart disease medicines, according to an Oxfam analysis.

Similar impacts were also found in Guatemala, which is part of another trade agreement with the US, according to a study in the journal Health Affairs. Not only were medicine price increases severe, but in many cases, low-cost generic medicines only entered the market long after they had been introduced in the US.

US government proposed terms under the TPPA would exact a heavy toll on the public health systems of our trading partners. Ironically, US taxpayers might also bear some of the cost. In the case of Vietnam, the U.S. provides millions of dollars in assistance to help pay for medicines to treat HIV and AIDS, a major public health problem in the country. If the Vietnamese government accedes to US demands in the TPPA, the cost of these medicines will most likely rise.

TPPA is definitely a step backward on public health and access to medicines. Despite attempts by the US Trade Representative’s office to spin it otherwise, it’s also a confounding step backward for the Obama administration.

I’ve never understood the drive by policy-makers to subsidize investment. I can understand subsidizing investment in specific sectors or activities or even regions when there’s a clear public policy purpose. Think transportation, or renewable energy, or hurricane-hit cities. But why investment generally? Why are capital gains taxed at 15% when other income, like wages, taxed at 28-45% (depending on tax bracket and whether you include social security taxes)? They say it takes money to make money, but should the tax code reinforce that unfair truism? Why should people who have money to invest pay less in taxes than people who only have their labor to contribute?

Cambodian farmers in rice fields. Photo by Patrick Brown/Oxfam America.

Leaving aside the raw political power of rich people who benefit, the idea that rationalizes the subsidies for investment is that capital is scarce and that people need to save more. In the US, with a very low consumer savings rate, one might think that capital is rare indeed, what with everyone buying flat-screen TVs and SUVs and generally blowing their paychecks as soon as they can cash them. “A high capital gains tax discourages saving and risk-taking…”, says the economic oracle.

But, in fact, capital is not scarce in the US. And risk-taking is rampant. In the last 15 years, we’ve seen booms and busts all over the place, with investors making insane (in retrospect) gambles. Remember the dot-com boom when investors were falling all over themselves to shovel money to half-baked ideas (pets.com, cosmo.com)? To appeal to these risk-loving investors, Wall Street invented exotic new investment instruments, like securitized home mortgages. A flood of money streamed in and helped build a massive housing bubble.

That went splat and a global financial crisis ensued.

With the rise and fall of the dot.coms, real estate, and the stock market generally, investors are looking for the next thing. Risk is ignored or minimized. Or re-defined. And the next big thing looks to be commodities futures, particularly agricultural commodities.

Except for gold, commodities weren’t viewed as good investment bets in the past. And there weren’t easy ways for investors to directly participate in commodities markets. In addition, regulations limited the ability of pure speculators to get in the agricultural commodities game.

But, through lobbying and inventive financiers, the regulatory and technical limits have crumbled away, and investors of all different kinds are now getting heavily involved. Since agriculture commodities are food, this raises some serious questions about the impact of this investment interest on food security.

This nice video tells the story.

Congress and the President have dodged a bullet with a short-term deal to keep the government running through March 18. But the negotiations around budgets and spending promise to be a prominent feature of the political discussion through 2011.

Budgeting is a blunt tool to make policy – and yet it’s one the most common ways that it’s done. Cutting one thing rather than another is a way that policy-makers express their values, vision, and priorities. Congress and the President should be looking for budget cuts that can deliver secondary benefits. Here are eight ideas that would save taxpayer money and might also help poor people in developing countries. Please note: some of these ideas are provocative and don’t reflect the official policy of Oxfam (yet).
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