Food commodity bubble driven by speculation

A strong argument that rocketing rises in food prices are largely due to speculators pushing commodity markets higher has been promoted by the BBC this week.

Commodity index tracker funds are pouring “a wall of new money” into futures markets, driving prices to new highs, which then suck in still more investment, it is argued in the BBC’s File on Four programme broadcast on Tuesday evening, which is repeated on Sunday 25 May at 5pm. Still more money is invested through financial derivatives and hedge-funds.

While market fundamentals, such as Australia’s drought-hit 2007 harvest and Canada’s flooded 2008 crops, have created some upward pressure, they do not justify the almost unprecedented rises in many commodity prices, commentators argued. They liken the sharp upward trend to the dotcom and property bubbles, warning of a sharp readjustment and price crash.

Rising prices

However, commodity investors, like Jim Rogers who runs the third largest commodity index fund in the world, insists that such funds do not artificially inflate prices. Prices are rising, he argues in the programme, due to a chronic shortage of supply, while demand from countries such as China and India soars.

“Index funds are having an effect on prices, perhaps because the fundamentals are right. There is no oil, there is no rice, and food inventories are at their lowest they’ve been for 60 years,” he argues.

In the past year, Nicholas Brookes of City commodity trader ETF Securities, says his company has handled £500m of traded investments in agricultural products, the BBC adds on its website. “There is no question that we have seen a sharp increase in this kind of futures trading. But the flows that are going into these products are miniscule compared to the underlying production of such agricultural goods globally. My sense is that the level of these kind of investments will reduce over time.”

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