Government intervention may be needed to burst the huge bubble that has developed in the price of commodities such as food staples and oil, a UN report said.
Prices have rocketed in response to dysfunctional commodities markets, said the report, which also disputes the view of many senior economists and central bankers that commodity prices have jumped as a result of a surge in demand.
“The changing role of commodity markets, which are turning into financial markets, has enormous repercussions for the economy,” said one of the report’s authors, Heiner Flassbeck, a director at the UN Conference on Trade and Development (UNCTAD).
Photo: AFP
Investors are encouraged to behave like a herd, said the report, with few incentives to arbitrage or bet against the tide of rising prices. Without checks and balances in the system, investors create price bubbles that put many basic foodstuffs out of the reach of millions in the developing world.
Oil may be as much as 20 percent overvalued, while maize — the staple food of many developing world economies — is subject to wild swings in price, it said.
In April, the World Development Movement blamed Barclays Capital, the investment banking arm of the high street bank, for driving up prices. Barclays Capital is the UK’s biggest player in food commodity trading and one of the top three banking players, along with Goldman Sachs and Morgan Stanley. It has pioneered the creation of derivatives that -allow pension funds and other investors traditionally barred from commodities exchanges to bet on food prices. Nearly US$270 billion is invested in derivatives that follow commodity prices, up from US$90 billion in 2005, according to UNCTAD.
A separate report by UN special rapporteur on the right to food Olivier De Schutter argued that the appetite for investments in commodities was even higher.
He found that commodity index funds rose from US$13 billion in 2003 to US$317 billion by 2008. While there are no definitive figures on how those index funds break down, one estimate suggested their holdings in agricultural -commodity markets rose from about US$3 billion to more than US$55 billion over that period.
Using these new derivative products, pension funds, especially in the US, have invested large slices of their overall portfolio in commodities as it has become more difficult to generate above average returns from more traditional sources of income, such as stock and bond markets.
UNCTAD, which commissioned the report, said the efficient market hypothesis that many economists believe regulates trading in commodity markets has broken down.
“Another major factor is the financialization of commodity markets, which has played a significant role in price developments in recent years,” the report said. “This phenomenon is a serious concern, because the activities of financial participants tend to drive commodity prices away from the levels justified by market fundamentals, with negative effects on producers and consumers.”
Traders are unaware of other buyers and their trading positions, information that can prove crucial when deciding to buy or sell a commodity.
They said the situation in the EU was worse than the US, where regulators produced weekly reports on rule changes and trends. Largely unregulated over-the-counter markets, which allow -institutions to trade with each other away from the main markets, also needed greater transparency, it said.
UNCTAD said a transaction tax on commodity trading, which could raise billions for investment in developing countries, would slow the pace of financial markets, limiting the scope for misinformation.
Commodity prices reached a record in 2008 as traders anticipated a rapid recovery from the credit crunch of 2007. Critics of commodity traders fear a slowdown in the global economy could trigger a sell-off in commodity derivatives, triggering exaggerated falls in prices.
STEPPING UP: Diminished US polar science presence mean opportunities for the UK and other countries, although China or Russia might also fill that gap, a researcher said The UK’s flagship polar research vessel is to head to Antarctica next week to help advance dozens of climate change-linked science projects, as Western nations spearhead studies there while the US withdraws. The RRS Sir David Attenborough, a state-of-the-art ship named after the renowned British naturalist, would aid research on everything from “hunting underwater tsunamis” to tracking glacier melt and whale populations. Operated by the British Antarctic Survey (BAS), the country’s polar research institute, the 15,000-tonne icebreaker — boasting a helipad, and various laboratories and gadgetry — is pivotal to the UK’s efforts to assess climate change’s impact there. “The saying goes
Floods on Sunday trapped people in vehicles and homes in Spain as torrential rain drenched the northeastern Catalonia region, a day after downpours unleashed travel chaos on the Mediterranean island of Ibiza. Local media shared videos of roaring torrents of brown water tearing through streets and submerging vehicles. National weather agency AEMET decreed the highest red alert in the province of Tarragona, warning of 180mm of rain in 12 hours in the Ebro River delta. Catalan fire service spokesman Oriol Corbella told reporters people had been caught by surprise, with people trapped “inside vehicles, in buildings, on ground floors.” Santa Barbara Mayor Josep Lluis
Police in China detained dozens of pastors of one of its largest underground churches over the weekend, a church spokesperson and relatives said, in the biggest crackdown on Christians since 2018. The detentions, which come amid renewed China-US tensions after Beijing dramatically expanded rare earth export controls last week, drew condemnation from US Secretary of State Marco Rubio, who on Sunday called for the immediate release of the pastors. Pastor Jin Mingri (金明日), founder of Zion Church, an unofficial “house church” not sanctioned by the Chinese government, was detained at his home in the southern city of Beihai on Friday evening, said
TICKING CLOCK: A path to a budget agreement was still possible, the president’s office said, as a debate on reversing an increase of the pension age carries on French President Emmanuel Macron yesterday was racing to find a new prime minister within a two-day deadline after the resignation of outgoing French Prime Minister Sebastien Lecornu tipped the country deeper into political crisis. The presidency late on Wednesday said that Macron would name a new prime minister within 48 hours, indicating that the appointment would come by this evening at the latest. Lecornu told French television in an interview that he expected a new prime minister to be named — rather than early legislative elections or Macron’s resignation — to resolve the crisis. The developments were the latest twists in three tumultuous
RSS