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Is Speculating on Food Dangerous?

ROME – The prices of many staple foods increased dramatically during 2007-2008, creating a food crisis for many poor and developing countries. International prices of maize, rice, and wheat, for example, reached their highest levels in 30 years, causing political and economic instability – and leading to food riots – in many countries.

Several factors contributed to the crisis, including high oil prices, high demand for crops from the bio-fuel sector, falling global stockpiles of food commodities, and lower cereal production. Strong economic growth and expansive monetary policies further boosted the trend, as did protectionist measures, such as export restrictions.

While these factors undoubtedly placed upward pressure on food prices, they alone cannot explain the steep hikes. Some believe that the crisis was amplified by speculative trading in commodity futures, which have become an integral part of food markets.

Commodity futures are formal agreements to buy or sell a specified amount of a commodity at a specified future date for a specified price. They thus provide an important instrument for hedging price risks in commodity markets. By entering into a futures contract, both buyer and seller gain certainty as to the price of their subsequent transaction, independent of actual developments in the market.