Speculation: From minefield to trench warfare

In response to a frequently heard complaint that even the experts do not agree with each other, we have compared and assessed a number of studies and opinion articles. It is not my intention to repeat the content of the report here. I will limit myself to concluding that there is no firm evidence for the claim that financial speculation on agricultural futures markets (for instance through index funds) has been responsible for driving prices upwards in 2007/08 and 2010/11. However, it does appear that the great influx of speculative capital has led to small-scale and short-term price fluctuations. Nevertheless, it is improbable that these fluctuations caused the starvation of millions of people or the revolutions in the Arab world as some people have claimed.

We are preparing ourselves for criticism of this report, and some of that criticism will be harsh. We have noticed that this debate is so sensitive and even emotional that every punctuation mark will be scrutinised and that fault will be found with everything, if possible. The debate on speculation resembles trench warfare: the two sides have dug themselves into their positions so deeply that neither is willing to admit that they may have made any kind of error or misjudgement. Everyone eagerly quotes from studies that support their own arguments, and 'overlook' studies that tell a different story. The Zembla television documentary on speculation and food prices broadcast on 23 December 2011, for instance, edited out any dissenting opinions for the sake of convenience. Those who try to form a well-founded opinion on what is true or false can no longer see the wood for the trees.

A journalist from the Volkskrant daily newspaper recently asked me why the debate keeps flaring up, again and again. I think it is because a headline like 'speculation leads to starvation' will always attract more attention than something like 'actually, there's not much to tell'. Policy-makers are keen to demonstrate that they are doing something about high food prices and thus also starvation in the world. The high food prices are caused by various factors as we explained in a previous LEI report. These high prices cannot be brought down quickly or easily. Acting to combat speculation on futures markets, on the other hand, is much easier as demonstrated by Sarkozy’s agenda for the G20 when France held the presidency. This is especially true since the start of the financial crisis. Since then, confidence in the financial world fell to such a low point that financial traders are now generally seen as unscrupulous money-grabbers. In this climate, even trading in derivatives - i.e. 'speculating with food' - is by definition 'immoral'.

Unfortunately, there is quite a lot of confusion about exactly what a 'speculator' does. The word has negative connotations, despite the fact that speculators fulfil a specific role in financial futures markets. Speculating with actual sacks of grain is often confused with speculating on the futures market with derivatives, which is something very different. If you buy and store a lot of sacks of grain, you drive up the grain price. But by speculating on derivatives, you don't actually buy any grain; you simply bet on the price. Compare it with horse racing: betting on a horse will not make it run any faster.

A few months ago, I was embroiled in a discussion with someone who was firmly convinced that speculative capital on agricultural futures markets had led to price increases. My opponent finished by drawing the following conclusion: “It's like homeopathy. There's no scientific evidence for that either, but it still works”. I therefore do not expect our report to put an end to the debate. On the contrary, it could even result in the debate being prolonged further. In itself, that is not necessarily a bad thing, as long as it is based on facts. I am - and will always be - an academic and scientist; one who has hopefully not yet dug herself into an immovable position, and one who is keen to be persuaded by facts.