Speculation, Food Prices & Firm Reputation Risk

In any number of commodity classes, there is the accusation that speculators and other sorts of profiteers are driving up prices to a degree unwarranted by economic fundamentals. You often hear this with regard to oil, but it's also an accusation heard with regard to foodstuffs as their prices have exploded upwards. (Developing countries are supposed to be especially vulnerable to these shocks since food expenditures take up more of a poor households's expenditures.) And, of course, the normative issues behind speculating in food are much greater than those in oil since you cannot live without the former.

I recently came upon an interesting Reuters article reminding how diversion of corn crops for ethanol is causing the price of this crop to increase Stateside. This concern is especially salient this year when yields of crops alike corn have been hurt by drought conditions. Almost as an aside, the article also mentions controversies over commodity speculation in foodstuffs. Given that many commodity traders were blamed for inflating food prices--there remains considerable controversy over this accusation--many have nevertheless become wary of being blamed this time around.

One of the solutions that traders have devised is to simply avoid inclusion of food-related commodities in various indices and investment funds that may tempt certain parties to speculate on food prices. In any case, many financial services firms which do not wish to subject themselves to this form of reputation risk are avoiding the inclusion of these commodities:

The price surge is also reviving a debate over the role of financial speculators in commodity markets. Big banks and institutional investors were often blamed for inflating prices back in 2008, although academic and government studies have offered conflicting views over the cause. Commerzbank said it had joined two of its German peers in restricting food-related investments by stripping agricultural products from its ComStage ETF CB Commodity EW Index TR, a small $145 million commodity index fund.

The bank declined to say why it had made the change, but lobby groups and traders said the motive seemed clear. "Climbing prices are creating reputational risk for banks," said Alexis Dawance, former manager of the agriculturals-focused Global Agricap Fund. "The big grain traders probably have much more impact in food and commodity trading, but this is part of the bigger picture, with all the fat cat bashing that has been taking place. ... If food prices continue to rise you will see this happening more and more."

These, my friends, are the real hunger games in a globalized world.