Swiss vote to ban food speculation. Clever or cuckoo?

Does speculation distort food prices and create hunger?

Food shortages are caused by many things, among them, bad weather, wars and supply problems.

Drought in Indonesia - © Akbar Solo |

Drought in Indonesia – © Akbar Solo |

There is also evidence that speculation amplifies natural price movements, sometimes to a point that limits access to food in poor countries.

In a working paperStephen Spratt, from the Institute of Development Studies says the standard response from speculators is always the same: ‘don’t shoot the messenger!’

He explains that market participants and supporters invariably argue that they simply reflect economic realities. However, while markets often reflect economic reality, they may also help to create it, especially when market sentiment is decoupled from economic fundamentals. Essentially, bullish market sentiment, can cause market prices to overshoot.

On the other hand, studies by the OECD and IMF, cited by the Swiss government, claim that food commodity speculation does not drive price fluctuation, and might even reduce it.

Sorting good trades from bad

If you are convinced that speculation is a problem, the next question is: how to sort good trades from bad?

© Paulgrecaud |

© Paulgrecaud |

Much trading is beneficial. Trading in financial derivatives allows food producers to lock in future prices, bringing predictability, which aids investment in food production.

It also improves liquidity, making it easier for buyers to find sellers. And, rather than distorting prices, speculators can sometimes drive prices towards reality by calling out doomed policies like the British government’s decision to support an overvalued pound in 1992.

Olivier De Schutter, a former United Nations Special Rapporteur on the right to food, suggests restricting market access to “qualified and knowledgeable” investors and traders who are genuinely concerned about the underlying agricultural commodities”.

De Schutter thinks price spikes are caused by institutional investors who do not have any expertise or interest in agricultural commodities, and who invest in commodities index funds because other financial markets have dried up.

But who is “qualified and knowledgeable”?

The proposed change to the Swiss constitution doesn’t consider such questions. Instead it bans entire categories of investors, without considering how qualified and knowledgeable individual investors are.

© Pjschneck |

© Pjschneck |

Stephen Spratt says in markets where prices can become subject to momentum driven booms “there may be a case for the creation of ‘virtual reserves’ where trading funds are established to take contrarian positions in the futures market, thereby preventing speculative bubbles taking hold”.

This is an interesting idea that would require very different changes to the Swiss constitution than those proposed by the initiative.

Push the bubble down in one place and it will pop up in another

To work, the rules would need to be applied everywhere. Trading is a business that knows no borders. Global trading operations can be set up virtually anywhere with relative ease.

© Rfischia |

© Rfischia |

Switzerland could take a symbolic stance, but it is unlikely the world would follow. The current beggar-thy-neighbour currency war that has left Switzerland with an overvalued currency and a central bank interest rate of -0.75%, shows the degree to which countries act alone to suit their own best interests.

The Swiss government votes “No”

While concerned about hunger and poverty, the Swiss government thinks banning food speculation in this way is a bad idea. It believes a ban in Switzerland alone will have no impact on world food prices. In addition, it says the rules would be easy to side step, expensive to enforce and costly for companies to comply with.

It fears jobs and tax revenue will be lost, not only in food commodity trading, but also in the broader investment industry as compliant traders decide to relocate rather than shoulder the costs of proving their trades comply with the new rules.

The National Council voted 130 to 58, with 5 abstentions to reject it, while the States’ Council voted 31 to 11 with 1 abstention to reject it.

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