Volatility in Food Prices: Futures Causedthe Market Manipulation

By Krishan Bir Chaudhary

I t i s g e n e r a l l y u n d e r s t o o d t h a t f u t u r e s t r a d i n g i n

a g r i c u l t u r a l c o m m o d i t i e s w i l l h e l p i n b r i n g i n g p r i c e

c e r t a i n t y . T h e G o v e r n m e n t o f I n d i a i n 2 0 0 3 - 0 4 h a d

i n i t i a t e d m a j o r s t e p s t o w a r d s i n t r o d u c t i o n o f f u t u r e s

t r a d i n g i n c o m m o d i t i e s , w h i c h i n c l u d e d r e m o v a l o f

p r o h i b i t i o n o n f u t u r e s t r a d i n g i n a l l t h e c o m m o d i t i e s

b y i s s u e o f a n o t i f i c a t i o n a n d s e t t i n g u p o f t h e N a t i o n a l

L e v e l C o m m o d i t y E x c h a n g e s . The momentumgathered in 2003-04 continued in 2004-05 andmanifested itself in increases in volumes, participation,number of commodities traded and various newinitiatives taken by the National Exchanges. The majoragricultural commodities traded at these exchangeswere soya oil, guar seed, guar gum, chana, jute, rubber,pepper, turmeric, wheat, kapas (cotton) etc. Theseexchanges have introduced various innovations whichwould increase efficiency of agricultural marketingin the country. However, on account of speculativetrading and impact of prices of essential commodities,futures trading in wheat, rice and pulses like tur andurad has been suspended by the Forward MarketsCommission as it caused market manipulation, leadingto a rise in prices. But, still, a future trading is beingcarried out in a number of agricultural commodities.

The recent initiatives on part of Finance Minister P

Chidambaram is testimony to the fact that futurestrading in farm commodities could be the major causefor market manipulation. Presenting his Budget 2008-09, he slapped a commodities transaction tax (CTT)on options and futures on the lines of the existingsecurities transaction tax. "The commodity futureshave come of age in the country and should be treatedat par with the equity market," he had said.Chidambaram also brought the commodity futuresexchanges in the ambit of service tax. Thesemeasures were aimed at curbing manipulation.

It must be borne in mind that the government's moveis only a piecemeal approach although it is increasinglyrealising the damage incurred by futures trading inagricultural commodities. As a corrective measure itshould act fast to stump the problem in the bud bybanning futures trading in all agricultural products.There is a wrong notion that the farmers arebenefiting from the existing futures trading inthe country. The farmers get the lowest pricefor their produce in the season at harvest and,thereafter, the produce passes into the handsof traders and corporate houses that manipulatehigh prices for commodities in the futuresmarkets. Farmers have no opportunity to

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Lok Samvad, Newsletter, 01 Sep 2008

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participate in this.

The Economic Survey 2007-08 clearly says: "Directparticipation of farmers in the commodity futuresmarket is somewhat difficult at this stage as the largelot size, daily margining and high membership fees -work as a deterrent to farmers' participation in thesemarkets. Farmers can directly benefit from the futuresmarket if institutions are allowed to act as aggregatorson behalf of the farmers."

Farmers have no time to participate directly in thefutures market. They have to prepare the field afterharvest for the next crop. The concept that institutionsor corporate houses should act as aggregators onbehalf of farmers amounts to leaving the peasants atthe mercy of these marketing giants.

The government has now gone into a panic mode asinflation, as measured by the point-to-point movementof the wholesale price index, reached a 40-month highat 7% for the week ended March 22, 2008. Yet, it isnot totally critical about the neo-liberal architectureof the Economy that it has imposed upon the nation.It is taking a piecemeal approach like banning exportsand liberalising imports of certain commodities. It istime the government rejected this neo-liberal andcorporate-led agriculture model and replaced it by afarmer-centric one.

There is no shortage of food either at the global or atthe domestic level. According to a recent report ofthe International Grain Council (IGC), the world wheatproduction would be at 646 million tonne (mt), an

While there has been widespread reporting of theriots that have broken out around the world as a resultof the global food crisis, little attention has been paidto the way forward. The solution is a radical shift inpower away from the international financial institutionsand global development agencies, so that small-scalefarmers, still responsible for most food consumedthroughout the world, set agricultural policy. Threeinterrelated issues need to be tackled: land, marketsand farming itself.

In March 2008, the United Nations Food andAgriculture Organisation (FAO) and otherinternational agencies began talking openly about aglobal food crisis. As with many such crises, theywere a little late. Food prices - especially for cereals,but also for dairy and meat - had been rising throughout2007, markedly out of step with people's incomes.People had coped by changing their eating habits,which included cutting back on meals, and had takento the streets to demand government action. By early

increase of 42 mt over the previous year, due to a2.5% increase in the area under cultivation. The globalprices of maize were around $240 a tonne by March27. The IGC forecasts global maize output to declineby 20 mt to 748 mt. Barley output would increase10% to 148 mt.

According to the official estimate, India has achievedrecord grain production of 219.32 mt in 2007-08,including 94.08 mt of rice, 74.81 mt of wheat, 36.09mt of coarse cereals, and 14.34 mt of pulses. Thecotton output is estimated at 23.38 million bales of170 kg each, an all-time record. The oilseeds outputis estimated at 27.16 mt.

Despite the good production, there is adeliberate manipulation of food prices both atthe global and at the domestic levels. At theglobal level, there are a few corporate playersin the food business that buy produce fromfarmers cheap, hoard the stock and manipulatethe prices. The bio-fuel programme in Europeand the US is also a contributing factor to pricerise.

In India, too, the corporate houses and retailchains have been allowed to buy produce fromfarmers, hoard and manipulate the market. Thefarmers do not gain in the process as they arepaid relatively lower prices than what thecorporate houses quote on the futuresexchanges or in the spot market, or at what theretail chains sell to the consumers.

Getting Out of the Food Crisis

2008 grain prices were surging and riots had brokenout in nearly 40 countries, instilling fear among theworld's political elites.A few months have now passed since the global foodcrisis was put on the world agenda. The causes ofthe problem have been identified and more or lessunderstood. Yet the food crisis is still unfolding. Pricesare continuing to climb, a whole class of "new poor"has emerged, governments are scrambling to find ormanage grain supplies, and the eruption of anothermajor setback could provoke a really dramatic worldcrisis.Everyone agrees that something needs to be donebut there is vast disagreement as to what this implies.The policy priests at the World Bank, the World TradeOrganisation and the International Monetary Fund,the corporate boards of directors and, indeed, mostgovernments and their teams of advisers want us tocontinue on the course of industrialising agricultureand liberalising trade and investment, even though this

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recipe just promises more of the same in the future.

Social movements and others who have been fightingthe injustices of today's capitalist model see thingsdifferently. For them, it is now time to break with thepast, to mobilise around a new, creative vision thatwill bring not only short-term remedies, but also thekind of profound change that will actually get us outof this food crisis - and, indeed, the unending seriesof crises (climate change, environmental destruction,poverty, conflicts over land and water, migration, andso on) that neoliberal globalisation generates.

Radical transformation

Many people are becoming aware that nosolution is possible unless we open the doorsto a real shift in power. The policymakers,scientists and investors who have led us intothe current mess cannot be relied upon to getus out of it... Those in power seem capable ofonly knee-jerk responses that amount to moreof the same: more trade liberalisation, morefertilisers, more GMOs and more debt to makeit all possible. The very notion of, say, rewritingthe rules of the finance system or clamping downon speculators are taboo topics. Even the foodself-sufficiency policies being adopted in somedeveloping countries, in themselves a verygood idea, often repeat failed Green Revolutionstrategies.

More disturbing, the political and business elites don'twant to face the fact that, whether you are a working-class homeowner in the US or a mother queuing forrice in the Philippines, confidence in the market hasbeen shattered. Farmers in Thailand are stupefied.Last year they were getting US$308 per tonne ofrice delivered to the mills. Today they're paid US$296,even though the price of rice to the consumers hastripled! The US dollar (still a global currency for foodtrade) has plunged, while the price of oil (on whichindustrial food production depends) has gone throughthe roof. Governments have started taking food outof the market, as they simply don't trust the way foodis being valued any more. The government ofMalaysia, for instance, has announced that it willbilaterally swap palm oil for rice with any nation willingto make the deal, while several other countries havebanned the export of food.

Against this backdrop of bankrupt ideas and systems,there is no other credible way forward than to rebuildfrom the bottom up. That means turning the wholething over: small farmers, still responsible for mostfood produced, should be the ones setting agriculturalpolicy, rather than the WTO, the IMF, the World Bankor governments. Peasant organisations and their allieshave clear, viable ideas about how to organise

production and services and how to run markets andeven regional and international trade. Ditto for labourunions and the urban poor, who have an importantrole to play in defining food policy. Many groups, suchas the National Farmers' Union in Canada, theConfederation Paysanne in France, ROPPA in WestAfrica, Monlar in Sri Lanka and the MST in Brazil,have issued strong calls to revamp agricultural policyand markets. International organisations, such as ViaCampesina and the International Union of FoodWorkers, are also ready to play a role.

Urgent action points

Three interrelated issues need to be tackled to get usout of the food crisis: land, markets and farming itself.

Access to land by peasant farmers is clearly central.With the surge in commodity prices and the newmarket for agrofuels, land speculation and landgrabbing are occurring on a horrific scale. In manyparts of the world, governments and corporations areinstalling plantation agriculture, displacing peasantsand local food production in the process. Indeed, themodel of export-led agriculture and importdependency at the root of today's crisis is going intooverdrive, destroying the very systems of foodproduction that we need to get out of our presentdilemma.

Land has, of course, always been a central demandfrom social movements, particularly for peasants,fisherfolk, rural workers and indigenous peoples.Agrarian reform tops the list of measures urgentlyneeded to put an end to the growing plague of ruralpoverty and to empower people to feed themselvesand their communities, reversing the explosion ofurban slums that is so central to this food crisis. It ishigh time that the proposals from the peasantorganisations are taken seriously and implemented.

Another major issue in dire need of attention is howto deal with the market. For decades, neo-liberal tradeliberalisation and structural adjustment policies havebeen imposed on poor countries by the World Bankand the IMF. These policy prescriptions werereinforced with the establishment of the WTO in themid-1990s and, more recently, through a barrage ofbilateral free trade and investment agreements.Together with a series of other measures, theyhave led to the ruthless dismantling of tariffsand other tools that developing countries hadcreated to protect local agricultural production.These countries have been forced to open theirmarkets to global agribusiness and subsidisedfood exported from rich countries. In thatprocess, fertile lands have been diverted awayfrom serving local food markets to producingglobal commodities or off-season and high-value

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crops for western supermarkets, turning manypoor countries into net importers of food.

One of the more obscene aspects of the food crisis isthe spectacular profits that the market has allowedbig agribusiness and speculators to make from it.Contrary to the impression conveyed by some in media,few farmers are seeing any benefits from the pricehikes. Corporations, on the other hand, are makingrecord profits at every link in the food chain - fromfertilisers and seeds to transport and trading. Earlierthis year, GRAIN documented the 2007 profitincreases of the major food and fertilisercorporations. In the first quarter of 2008, whilemany hungry people were further cutting backon the amount of food they eat, the major foodand fertiliser companies were reporting evenmore spectacular profit increases.

At the same time, massive speculation is occurring.According to a leading commodities broker, theamount of speculative money in commodities futureshas risen from US$5 billion in 2000 to US$175 billionin 2007. Half the wheat now traded on the Chicagocommodities exchange is controlled by investmentfunds. At the Agricultural Futures Exchange ofThailand, speculation on rice has, within one year,tripled the average number of contracts traded dailyon the exchange, with hedge funds and otherspeculators now representing up to half of the dailycontracts being traded.

All of this speculative activity from pensionfunds, hedge funds and the like, plus the shiftingof commodity trade from formal exchangemarkets to direct over-the-counter deals, issending prices soaring. Such a bubble is inherentlyunstable and bound to burst, with unpredictable results.With few exceptions, governments and internationalagencies are hardly talking about this part of the foodcrisis equation, let alone doing anything effective todeal with it.

In contrast, trade unions and farmers' organisationshave been vigorously calling for proper regulation andcontrols, particularly since producers and consumersare the groups most affected by it all. Calls by socialmovements for food sovereignty invariably includeurgent proposals for priority to be given to local andregional markets and for measures to be taken toreduce the dominance of international markets andthe corporations controlling them....

Then there is the issue of farming itself. The foodcrisis has galvanised the voices of the old GreenRevolution into calling for more of the same top-downpackages of seeds, fertiliser and agrochemicals. Sincethe main reason why the food crisis is hurting so many

people is their inability to pay today's high prices,simply boosting production is not necessarily going toresolve anything, especially if this means driving upthe costs of production. The high-yielding varietiesof staple foods that the Consultative Group onInternational Agricultural Research, the FAO and mostagricultural ministries are so enthusiastic about requiremore petroleum-based fertilisers and other chemicals,all of which have undergone huge price increasesthat effectively put them out of reach of manyfarmers. In any case, chemical fertilisers are one ofthe main sources of the greenhouse gases producedby agriculture. Throwing even more of them atalready exhausted soils, as many GreenRevolutionaries are now advocating, would merelypush the world deeper into climate chaos and furtherdestroy the life of the soils.

Here again, there is a vast array of solid proposalsand experiences for moving towards farming methodsthat are productive, non-petroleum based, and underthe control of small farmers. Scientific studies haveshown that these methods can be more productivethan industrial farming, and that they are moresustainable. If they are properly supported, such localfarming systems, based on indigenous knowledge,focused on maintaining healthy, fertile soil, andorganised around a broad use of locally availablebiodiversity, show us ways out of the food crisis. Tobuild on these, one has to stop relying on the expertsand start talking instead to local communities. Onewould need not only to build new strategies and tocollaborate with different players, but also to put anend to the criminalisation of diversity so that farmerscan freely access, develop and exchange seeds andexperiences. It would mean, too, that governmentsstop promoting agribusiness and export markets, andstart protecting and celebrating the skills, knowledgeand capacities of their own people.

Time to mobilise

It is clear that those of us outside governments andthe corporate sector need to come together as neverbefore to build new solidarities and fronts of actionboth to address the immediate problems of the foodcrisis and to build long-term solutions. If we don'twork together to facilitate a power shift that puts firstthe needs of the rural and urban poor, we will definitelyget more "business as usual". Reorienting ouragricultures and food systems to make them morejust, more ecological and truly effective in feedingpeople is no easy task, but surely we all have a partto play. Rather than wait or look for ready-madesolutions, we need to create those better systems now,collectively.

(Courtesy: GRAIN'S Seedling Magazine, June 2008)<title>Volatility in food prices futures caused the market manipulation</title><author>Krishan Bir Chaudhary</author><keywords>KICS2</keywords><publication>Lok Samvad</publication><pubDate>01/09/2008</pubDate><description>It is generally understood that futures trading in agricultural commodities will help in bringing pricecertainty. The Government of India in 2003-04 had initiated major steps towards introduction of futurestrading in commodities, which included removal of prohibition on futures trading in all the commoditiesby issue of a notification and setting up of the National Level Commodity Exchanges.</description><classif>K60</classif><entrydt>26/11/2008</entrydt><sd>PG</sd>

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