STATE OF THE ART ON FOOD PRICE SPECULATION

NTRODUCTION

CCF, CCFD Terre Solidaire, Food Watch, Oxfam-Solidariteit, SOS Faim and Woord en Daad, hereafter the Coalition, launch an Invitation to Quote (IQ) for a state of the art on food price speculation

The quote must arrive at latest on 7th of August 2023 midnight CET and stay valid until 18th of August 2023 midnight CET.

The Invitation to Quote (IQ) is structured as follows:

1. Terms of reference
2. Submission procedure
3. Decision procedure

The consultant’s quote could form the basis for a contract between him and the Coalition. However, this invitation to quote does not obliges the Coalition to proceed with the actual act of purchasing. No compensation can be claimed in case of non-acceptance of a quote or non-award of a contract.

Oxfam Solidariteit’s General Purchase Conditions apply. If there is an inconsistency between any of the provisions of these Conditions and a particular provision in the IQ or a contract then the provision in the IQ or the contract will prevail.

1.    TERMS OF REFERENCE

1.1.    BACKGROUND

The Coalition seeks to understand the mechanisms behind food price speculation and the impact speculation on the financial markets has on the price and price volatility of basic food products.

The deregulation of financial markets has increased since 2000. After 2008, new regulations on commodity derivatives markets were put in place, but partly dismantled during deregulation in times of the covid-19 pandemic. Since then, many new big commercial and financial players are participating in the food markets. Financial speculation on commodity derivatives markets (especially futures trading on exchanges) is seen as driving up food price volatility and food prices by a number of scholars. On the other side, this vision is contested by influential institutions (such as FAO, IFPRI, and others), maintaining that speculators are necessary to maintain liquidity in the market to, hedge risks, and based on their analyses show there is no / not sufficient causality between speculation and higher food prices. Others do not agree with this (including UNCTAD), stating that essentially there is now too much liquidity in the market driving up prices, and regulation is much needed.

Considering that food price speculation is complex due to the multiple financial products and actors it involves such as traders, investors, speculators, governments and the different interests and motivations at hand, we realise it makes it quite difficult to regulate but also makes it difficult for advocacy organisations to target the right policy making processes at the right time and with the right decision makers.

 

1.2.    PURPOSE AND OBJECTIVES OF THE RESEARCH

Considering the complexity of the matter, the lack of a coordinated coalition of NGOs following closely food price speculation in the context of the MIFID, the war in Ukraine and the inflation, the Coalition is looking for a consultant to produce a state-of-the-art report on food price speculation, that will provide the Coalition with an overview of existing literature, synthesise the content of the said literature and share the most relevant conclusions considering today’s current global food crises and our focus on the right/access to food for all.

With this study the Coalition wants to ultimately contribute to the public debate and put the need for regulation higher on the political agenda, through:
1.    Achieving a better understanding of the basics of food price speculation, what their role is in price setting and to price crises in the past and what is driving them today (see questions).
2.    Inform and build capacity within civil society in order to enable them to formulate a new angle of advocacy and ultimately put the regulation of food speculation higher on the political agenda. 
3.    Point out what additional research can be conducted to contribute to the public debate, possibly in the different countries of the Coalition (NL, BE, FR) if major variations are noticed (i.e. be ‘newsworthy’ for media-outlets).

1.3. Questions
The state of the art should enable the Coalition to answer the following questions
a) Which food and agricultural commodities markets are most concerned by speculation issues ?
b) Which mechanisms are behind food speculation, what are the market fundamentals? How does speculation provide liquidity, risk management, and price discovery? Does it hedge against risks for farmers?
i) What are the impacts of the financialization of that mechanism? If we want to challenge the alleged scientific consensus that there are no indications of excessive speculation of food commodities, we should examine the models underlying those articles and point out where they are flawed.
ii) On what fundamentals and other criteria are commodity derivatives prices (assumed to be) determined in general? How far does this reflect good price discovery? What was the availability of information about key commodity reserves? Based on what fundamentals has there been such price volatility?
c) The multiple actors involved in speculating and their contribution to food price crises.
i) What do financial institutions, such as hedge funds, have to report to Authorities for the Financial Markets? What are their formal obligations and how do they informally deal with it?
ii) How do the financial subsidiaries of the traders operate? Is it possible to distinguish how much of the traders’ profit is made by their financial activities vs. material trade? (quite possibly hard to find the information, which in itself shows the need for more transparency)
d) Existing international,(national and regional) regulation trying to prevent (excessive) food speculation, among others: the MIFID process, what is at stake, what is possible to regulate.
e) Identify existing and potentially relevant fora on food speculation issues: national/European level; G20; OECD; Global WTO
f) The interconnectedness between financial and physical markets: the link between financial and commodity markets, how changes in one market influence the other, and what the role/impact financialisaton of the food system has.
g) Explain the relationship between stocks (public and private), (the WTO position on the matter) and whether/how it influences speculation
i) Is the increase of public stock a solution to limit or regulate speculation?
h) The available and non-available Information: food speculation is often associated with opaque, asymmetrical information availability when it comes to proving its impact on food prices, but also when it comes to its main actors: some speculators/market actors have more access to information than others and might lead to unfair trading practices, how is that possible, and what can we do about it?
i) The (potential) impact of food speculation on food prices and food security, especially in the global south.

1.4. Key products and deliverables
A report of approx. thirty pages, excluding annexes, with the state of the art on food speculation with the following structure: The What, The Who and The How?
1. Context of food price crises
2. What is food speculation? The distinction between hedging and speculation for commercial actors and why the distinction in the markets is not so clear.
3. Who does ‘excessive( speculation ? which EU Bank/ investors are proposing investment funds exposed to index funds on food/commodities.
4. What regulation mechanisms (margin deposit, margin cost, limit position) exist on the European market ? Are there good practices in other regions or in the past that can inspire better regulation in the EU?
5. What do we know about the impact on food prices, food security especially in the global south and what don’t know we about it and what cannot be proven and why?
6. Suggestion/advice on additional research that (within the budget) can be undertaken to publish a new report on food price speculation that will attract media-attention, for example:
a. price and market-volatility on a particular commodity (that is not yet covered in the current literature) after the start of the Russian invasion in Ukraine.
b. After the 2022 Q1 bubble, prices stabilised somewhat. That suggests that there are also investors that lost big. Can we contact one of them, hear their experience? Would that be of value? If you take that side path, you do not only indicate that speculation on food commodities is unethical, but that it is also unwise and risky! This is also one of Ann Pettifor’s strategies in Great-Britain, telling the public that their pension funds are gambling with their money.

1.5. Methodology
Mainly desk review. thirty (30) pages. A Coalition Steering committee will suggest materials and contacts and a methodology, which has to be validated with the  consultant. The steering committee would appreciate the consultant working on a shared document to facilitate following up the process, with fixed moments of feedback.