Food-Price Rise Puts Focus on Speculators

By SAMEER MOHINDRU, WSJ

SINGAPORE—The run-up in global commodity prices is stirring debate in a number of countries over the role of financial speculators, a prospect that could fuel a regulatory backlash by governments keen to control food prices.

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An Indian vendor taking money from customer at a market in Mumbai. European Pressphoto Agency

The prices of many commodities undoubtedly would have risen anyway in response to recent supply disruptions and rising demand. But some political leaders are raising questions about how much investors such as commodities traders and hedge funds might be contributing to the run-up. That could leader to anger among consumers and draw yet more fire from politicians on the dangers of derivatives trading.

Already, many developing nations, including China and India are instigating price controls on foodstuffs to combat inflation and ward off the kind of discontent that led to riots in 2008. France, which holds the presidency of the Group of 20, is pushing for tighter regulation and transparency in the trading of commodities, including derivatives trading.

In China, after cotton, sugar, rubber and corn prices hit record highs in November, the government asked futures exchanges to raise trading margins, in some cases to more than 10%.

“We share the view that commodity price fluctuations have been, from time to time, excessive, and destabilize the growth of the economy,” Rintaro Tamaki, Japan’s vice minister of finance for international affairs, said last week.

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Excess speculation from “investment tourists” aggravates instability, sending signals that aren’t substantiated by fundamentals, said Abdolreza Abbassian, secretary for the Intergovernmental Group on Foodgrains at the United Nations Food and Agriculture Organization.

Similar sentiments swirling around a tripling of oil prices between 2004 and 2008 contributed to limits currently being hammered out in the U.S. on the positions financial buyers can take in a number of commodities. The recent run-up has complicated debate on the final rules there.

On futures exchanges in the U.S., the world’s biggest grain exporter, aggregate net long speculative positions in 14 major agricultural derivative contracts hit a record high of 104 million metric tons in November, well above the previous peak of 78 million tons in March 2008, an Australia & New Zealand Banking Group report said. Long positions are bets on rising prices.

That’s a big swing from earlier last year, when speculators were net short in U.S. agricultural futures, meaning investors were largely betting that prices would fall.

Parsing out the impact of speculators can be difficult.

According to Nobuyuki Chino, president of Unipac Grain, a Tokyo-based commodities trading company, U.S. wheat prices would be closer to $6 a bushel compared with current prices of around $8 a bushel had there been no speculative interest in wheat. Corn should be trading around $5 a bushel versus $6.5 a bushel now, and soybeans around $13.20, compared with $14, he said.

Others are skeptical of the claims. “I’ve seen some sort of studies [suggesting] speculation has added 20% to 30% to market prices, but they are never substantiated. What you can say is the futures markets at times trade at substantial premia to the underlying cash market,” said Ann Berg, a consultant to the U.N.’s food and agriculture agency.

With Asian derivatives exchanges gaining market share in recent years, there has been a surge in interest from global investors who want to park their funds in derivative products in the region, without the hassle of owning or storing physical commodities.

In India, for example, the cumulative value of futures trading in commodities in the nine months to December rose 50% to 82.7 trillion rupees ($1.817 trillion), according to data from the Forward Markets Commission, regulator of the country’s futures exchanges.

The Indian government has selectively suspended futures trading in politically sensitive food items in the past and authorities are still reluctant to lift export controls despite growing domestic stocks.

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