You might think that the devastating impacts of commodity price volatility on global hunger would require policy debates in multiple international organizations. Last week, the United Nations’ General Assembly (UNGA) held a high-level debate on how to address this very issue. The opposing views of panelists concerning the extent to which financial speculation is driving commodities prices comprised a vigorous debate. More troubling is an attempt to squelch U.N. agency policy analysis of this issue and other economic governance topics.
U.N. member countries with globally influential financial and commodity markets are attempting to remove economic policy analysis from the mandate of the United Nations Conference on Trade and Development (UNCTAD). This attack elicited an April 11 letter of protest from former UNCTAD staff, well as protests from developing countries that welcome UNCTAD’s analysis of the impact of financial speculation on commodity prices. According to the U.S. and EU, the U.N. should concern itself with capacity building to enable implementation of or adjustment to policies decided among the Group of 20 countries and at the International Monetary Fund and World Bank.
Developing countries fought back at the UNGA, making clear that they will not leave economic governance policy to organizations controlled by rich countries, such as the International Monetary Fund and the Group of 20. You can hear the panel presentations of the UNGA plenary debate on commodity price volatility here. IATP, together with the U.N. Mission of France and the International Working Group on Trade-Finance Linkages, organized a side event, summarized below, to complement the high-level debate.
The UNGA’s five-and-a-half-hour debate, also available on a webcast (Part 1, Part 2), continued the political wrangling that started last year over a UNGA resolution on commodity price volatility. We won’t attempt to summarize everything from the webcast. But there are a few common themes that should be noted, as well as a few fundamental policy differences.
First, the effects of high and volatile agricultural prices on food security and the achievement of U.N. Millennium Development Goals was a theme of both the panelists and of UNGA delegates who intervened with short and usually scripted statements. For example, according to Daniel Titelman, of the U.N. Economic Commission for Latin America and the Caribbean, higher food prices accounted for about 40 percent of the overall rate of inflation in the region.
The debate about the extent to which financial speculation has driven commodity prices since 2004 was encapsulated in a sharp panel exchange between Professor Jeffrey Sachs (Columbia Unversity) and Professor Michael Greenberger (University of Maryland School of Law).
Professor Sachs took the view (starting at minute 18) that the UNGA should be discussing how to support increase of crop yields in developing countries, rather than discussing the consequences of the deregulation of U.S. and EU commodity markets for agricultural prices, particularly in developing countries. Professor Sachs, citing his recent travels to the Sudan and Mali, on behalf of his Millennium Villages project, said that climate change was the major factor afflicting food security and that adoption of hybrid seeds, fertilizers and mechanization would increase yields to reduce food import dependence for developing countries. Professor Sachs, who was on the short list of nominees to become president of the World Bank, did not believe that financial speculation played a major role in agricultural futures prices.
Professor Greenberger fought deregulation while he worked in the Commodity Futures Trading Commission (CFTC) during the Clinton administration. He advises the Commodity Markets Oversight Coalition, to which IATP belongs. His testimony to the CFTC on the Dodd-Frank financial reform law is excerpted in IATP’s Excessive Speculation in Agriculture Commodities anthology.
Professor Greenberger strongly rebutted Professor Sachs’ contention that financial speculation was not a major factor in commodity price volatility and levels. Not unexpectedly, he referred (at about minute 33) to the now more than 100 academic studies that have demonstrated how removal of capital reserve requirements, non-enforcement of agricultural position limits, exemption of energy futures trade from regulation, High Frequency Trading strategies and the bundling of futures contracts in commodity index funds have all contributed to price volatility beyond what can be justified by supply demand fundamentals.
President Leonel Fernández Reyna of the Dominican Republic, who is also President of UNCTAD, lead the negotiations that resulted in the UNGA debate. As a panelist, he said that both the analyses of Professor Sachs on measures to increase food security and of Professor Greenberger on measures to regulate commodity markets were valid. There was no need to choose between them. Rather, there is an urgent need to complement the work of the Committee on Food Security with a U.N. agreement on how to reduce volatility in commodity derivatives markets with input from all the U.N. member states affected by the regulation and/or deregulation of commodity markets and the financial markets whose interest and foreign exchange rates affect agricultural and energy prices. The United States and other G-20 governments are likely to oppose at UNCTAD XIII discussion of any negotiations or preparations for negotiations of such an agreement, believing that those who have the markets should make the rules—or not.
We attracted about 40 country delegates at our side event, where UNCTAD’s Heiner Flassbeck and FAO’s David Hallam explained their agencies’ work on commodity price levels and price volatility. Flassbeck’s presentation to the high level debate (beginning at one hour and 27 minutes) explained how financial markets injected volatility into commodity markets without enabling effective commercial hedging against commodity price volatility. His side event remarks elaborated further on the “herd behavior” of financial speculators who invested to drive commodity prices higher regardless of supply, demand and other fundamental factors. He said that there was an unfortunate tendency to ignore the price information and price formation role played by financial actor investments in commodity markets.
Hallam’s presentation (beginning at minute 7) to the high level debate discussed how FAO had forecast in 2006 food security vulnerabilities that first appeared in 2007. However, these forecasts were ignored. FAO, in its advisory work to the Group of 20, launched an Agricultural Markets Information System (AMIS) in September to improve data reporting on physical stock holding, and data gathering capacity building and to issue alerts when warranted. He hoped that AMIS’ work would result in more timely responses from FAO members to food shortages. He believes that the econometric analysis concerning financial speculation in commodity markets is “very confused.” At the side event, he reiterated how low stock levels and bad policy choices, particularly export restrictions, had affected prices. He also noted that FAO had conducted regional workshops on price risk management whose results would be posted on the FAO website.
IATP gave a brief state of play analysis of the financial services industry fight against U.S. and EU legislation, and summarized the $29 trillion bailout of U.S. and EU banks by the Federal Reserve Bank emergency loans from 2007 to 2010. We further suggested that FAO and UNCTAD apply to become observers on the commodity markets committee of the International Organization of Securities Commissions (IOSCO), which advises the G-20 finance ministers. As an observer, UNCTAD and FAO could advise IOSCO about how the IOSCO recommended rules and principles for commodity market risk management were affecting UNCTAD and FAO members, particularly food import dependent countries. UNCTAD and FAO would be able to comment on drafts of IOSCO consultation papers and otherwise influence IOSCO commodity futures market recommendations. IATP also made these suggestions to the draft Civil Society Declaration for UNCTAD XIII.
It is unclear whether the UNGA debate will lead to an agreement on commodity price governance, advocated by President Fernández Reyna. UNCTAD will hold its thirteenth quadrennial meeting April 21–27 in Doha, Qatar. There the United States is expected to call for UNCTAD to cease any analytic work on economic policy and financial and commodity markets, such as its reports on how new financial actors and flows have introduced new sources of volatility into commodity and financial markets, for example through High Frequency Trading strategies. UNCTAD’s analytic work on markets and macro-economic governance has long been a thorn in the side of developed country governments that allow wide latitude for industry self-regulation of those markets.
IATP’s modest proposals concerning UNCTAD and FAO observer status in IOSCO could function as interim steps to build U.N. economic governance capacity during what promises to be a long struggle to realize President’s Fernández proposal for a U.N. agreement on commodity price volatility. Stay tuned for our blog on the results of the UNCTAD summit for commodity market regulation and policy analysis.
