Speculation Risks in Food Commodity Markets in the Context of the 2022 Price Spikes - Implications for Policy

Abstract

The structural and acute causes of the food price crisis in 2022 are more complex and more severe than in 2008, but with regard to the risk of excessive speculation, lessons can be learned from the experience of the past price crises. Preventing excessive speculation in commodity futures markets is again crucial to ensure market integrity and functioning.

Somewhat reassuringly, market transparency has improved, as compared to 2008-2011. For example, early warning indicators have been implemented and data availability has significantly improved, e.g., through Agricultural Market Information System (AMIS).

Also noteworthy is that financial markets in the U.S. and Europe are now more strictly regulated than they were before 2007/2008. However, it is doubtful whether the current regulations in food commodity markets related to position limits (number of contracts an investor can hold) and increased market transparency are fully effective against excessive speculation.

The share of speculative market activity in agricultural commodities has already increased since the end of 2020, which is also the result of increased hedging demand. High levels of inflation, and expected monetary policy shifts add to speculative tendencies between stocks markets, bonds-, and commodity markets. This increases the risks that food price formation will be decoupled from food market fundamentals and more influenced by financial market strategies.

When market uncertainties remain high or increase due to war, discretionary trade policies, and climate shocks, this also increases the risk that excessive food speculation will further soar prices.

At this time, we cannot rule out the risk that excessive speculation already contributes to food price volatility and amplified spikes. Therefore, a mix of policy instruments should be considered that include: information and diagnostics, coordinated trade and stock release policies, strengthened regulation of food commodity futures, encouraging voluntary non-speculative behaviour, and investment in de-risking food systems. Further details of actions are elaborated in this brief.

Keywords: food speculation, agricultural commodity markets, Ukraine-war, wheat prices