EU to wage war against speculation on commodity markets

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Brussels, like Washington, is planning to launch measures to regulate commodity exchanges and curb speculation, as well as step up transparency in food trade after the recent surge in agricultural commodity prices.

"We are examining with care rules adopted in the United States (in raw materials markets), and notably those concerning position limits or powers given to regulators, including a mandate against speculation," said EU Internal Market Commissioner Michel Barnier. 

"We are ready to be pioneers too, if possible," Barnier added during a two-day conference in Brussels on financial services, which ended yesterday (21 September).

The commissioner underlined that the planned reform of the law, known as the Markets in Financial Instruments Directive (MiFID), and the envisaged review of the EU directive on market abuse will provide an opportunity for "an ambitious overhaul of the markets of raw materials".

The first legislative proposal is expected for spring 2011.

Food prices in the spotlight

Barnier's statements were echoed by his colleague in charge of agriculture, Dacian Ciolo?, who for the first time openly backed a tough line against speculation on commodity markets.

Speaking at the same conference, Ciolo? joined the chorus of criticism against speculation, which is portrayed as responsible for current price volatility.

"It's clear that the evolution of agricultural commodity prices, both upward and downward, has never been so abrupt. This has an impact on farmers, food-makers and consumers. Speculation should not endanger economic activities which are normally viable," the EU agriculture commissioner stated.

Echoing Barnier, Ciolo? also highlighted as a crucial step forward the reconsideration of "position limits to counter excessive movements".

The US authorities have imposed limits on the number of commodity contracts held by financial actors, such as banks or hedge funds. It is not clear how far Europe will go with its reform.

However, some experts have already criticised the US move on the grounds that there is no way to measure excessive positions.

Critics underline that high volatility in food prices is the consequence of other factors rather than speculation, which is instead seen by financial actors as a way to protect investment against potential risks, thus favouring further investment.

They point the finger at weather conditions, which dropped production in top wheat exporters, such as Russia or Ukraine (EURACTIV 26/07/10), inflation driven by cash injections by central banks and policies favouring biofuel production over crops.

EU Agriculture Commissioner Dacian Ciolo? said: "I can understand the nervousness of operators. Two top world actors (Russia and Ukraine) have withdrawn from the market. But a deeper analysis of the situation shows the disproportionate character of the price evolutions observed in the last weeks," he said.

EU Internal Market Commissioner Michel Barnier said: "The review of MiFID is a key occasion for an ambitious overhaul of the markets of commodities. We cannot act to improve the functioning of these markets without an intervention on their physical aspects, the instruments and the financial markets which play a crucial role in determining prices."

Speaking on Monday (20 September), French MEP Eva Joly (Greens/EFA) blasted operators who speculate in agricultural markets by ''gambling'' on the price of foodstuffs.

"For years we have encouraged developing countries to abandon subsistence farming in favour of intensive agriculture for exports, like tobacco. They have become very dependent on imports. Yet now, they are importing at high prices and are no longer able to export,'' said Joly, who chairs the European Parliament's development committee.

"The fact that we are unable to regulate these markets is awful. We have learnt nothing from the recent crisis,'' she deplored. "We can regulate speculation if we want to," she said, but questioned the will of EU member states to do so.

Regarding agricultural commodities, Joly wants operators to be prevented from investing more than 3% of their capital in derivatives markets and called for greater transparency. "We would like to know how much [US investment bank] Merrill Lynch earned by speculating on corn," she added.

Jorge Montepeque, global editorial director of markets and price assessments at Platts, a data provider on commodity prices, underlined that "quantitative easing is one of the reasons why we have higher prices now. A lot of money was added in the money market, and as a consequence prices grow," he said.

"Many governments are mandating the production of ethanol. This means taking land for grain to produce bio-fuels. Any policy in favour of bio-fuel is a direct destruction of food. No wonder that food prices are increasing today”, he added.

Jonathan Whitehead, managing director at Barclays Capital, highlighted that "physical supply and physical demand is the key element to explain why prices grow. We should not look for convenient scapegoats. The scale of reported speculation in commodities has been hugely inaccurate. And no evidence has been found that speculation has increased prices".

"The reason is a massive increase in living standards in China," he said, explaining that this had pushed prices up.

Myriam Vander Stichele, senior researcher at Somo, a research centre on the global impact of multinationals' policies, held the opposite view. "We really need strict position limits and strict regulation. Both physical and paper markets are now open to abuses. There are huge problems of conflict of interest. Regulation is a huge improvement in transparency," she argued.

"We see that Commissioner Barnier has a lot of public support when he says to limit speculation on food commodities, but now it is the moment to go into details of real regulation," she added.

In December 2008, the European Commission proposed policy measures aimed at improving market transparency. It decided to enhance monitoring of developments in agricultural markets and analyse the impact of price speculation (EURACTIV 11/12/09).

The move was prompted by soaring global food prices in 2007-2008. Higher food commodity prices had also triggered a new debate about maintaining sufficient subsidies for the EU farming sector, as some argued that feeding people cannot be left to the mercy of the market. 

As global prices currently hit new highs after the peak in 2008, the European Commission sold its intervention stocks, removed the obligation to set aside 10% of arable land for the 2008 harvest, increased milk quotas by 2% and suspended import duties on cereals. 

  • Spring 2011: Expected proposals to review MiFID and Market Abuse Directive.

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