Page last updated at 05:27 GMT, Monday, 19 May 2008 06:27 UK

Who is to blame for food price rises?

By Nigel Cassidy
Business reporter, BBC News

A worker collects wheat on the outskirts of Islamabad
The price of wheat and corn crops have escalated to record highs
Global food prices may have shown some signs of stabilising, according to the United Nations.

But it has not stopped large numbers of investors from piling into food commodities and options traded in the City of London and other financial centres around the world.

So much so that some farmers and foreign governments are putting the blame firmly on speculators for at least some of the 40% year on year price gain for staples like wheat, soya and maize.

Speculators blamed

It is inevitable that financial investors are going to latch onto any cyclical commodity that's seeing sharp price rises. Property may have bombed, demand for industrial raw materials may be peaking. Yet everyone has to pay more for food, so why not invest in farm products?

There is no question that we have seen a sharp increase in this kind of futures trading
Nicholas Brookes
Commodity Trader, ETF Securities

Right now, everything seems to be conspiring to push up basic food prices. From drought to poor crops, from high fuel prices to explosive demand, and changing diets in China and the Far East. And most of all, precious farmland being switched to crops for biofuels.

Small wonder that in their quest for investments to beat inflation, even some traditional pension funds are trading in the likes of wheat, soya beans and livestock.

Pushing up prices

In the past year, Nicholas Brookes of the established City commodity traders ETF Securities says his company has handled 500m ($1bn) of traded investments in agricultural products.

"There is no question that we have seen a sharp increase in this kind of futures trading. But the flows that are going into these products are miniscule compared to the underlying production of such agricultural goods globally. My sense is that the level of these kind of investments will reduce over time."

combine harvester
The UN say that food prices could have reached their peak

Nicholas Brookes is also firmly of the view that US subsidies on crops for ethanol production have pushed up world prices for farm products like maize and soya beans far more than any market speculation.

So should there be new regulations or curbs? Certainly left-wing politicians in India and Belgium think so. They have both demanded a ban on the trading of options in agricultural products.

Yet even academics devoted to helping the world feed itself don't put the blame on traders.

'Causes interconnected'

Dr David Barling of the Centre for Food Policy at City University in London says he believes most of the market speculation in food products occurred after prices of grain and other commodities began rising sharply on world markets 18 months ago.

"It may have put further pressure on prices, but the causes are many, interconnected, and differ depending on the commodity concerned".

Corn being picked
Prices have levelled off, but show no signs of dropping

Graham Mackay, chief executive of SABMiller, the world's largest brewer, says his company is braced for further price rises in the main raw materials of barley, hops, and maize, and he thinks speculators may have played some part in putting pressure on prices.

But he says he is not remotely in favour of curbs on their activities. He says the market is already distorted by subsidies which have discouraged an increase in supply.

Other factors

There are two further indicators that speculators aren't ultimately to blame for the soaring price of food. One is that the price of rice has soared, even though most of the world crop is consumed in the countries where it is produced, and not generally offered as a traded option.

And world food stockpiles are low, suggesting agricultural products are not being bought wholesale to sell on at an even higher price.

Even so, "food speculators" are an easy target for politicians struggling to show they are doing something to mitigate price rises they are near powerless to resist.

So it is inevitable those who play the agricultural commodity markets can expect some more stick, until real food prices start coming down to earth.

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