'Betting on Hunger': Market Speculation Is Contributing to Global Food Insecurity

An investigation has found that the industry and lobbyists have sabotaged efforts to rein in such behaviour. 

New Delhi/London/Rome: Food prices have climbed to unprecedented levels in recent months, adding to an already precarious food security situation in large parts of the developing world.

Nearly 200 million people already faced acute food insecurity in 2021, almost double the figure from 2016, according to a United Nations report released Wednesday. 

 The report blamed the “toxic triple combination” of climate change, the economic effects of the pandemic and conflict over the past two years.  

According to the report, in 2021, over half a million people (570,000) across Ethiopia, South Sudan, southern Madagascar, and Yemen were on the “verge of starvation and death”. This number is four times more than the number in 2020. 

This year, the situation has worsened as the cost of food has skyrocketed following Russia’s invasion of Ukraine that prompted fears that there could be supply disruptions from two key global suppliers of agricultural commodities. The Food and Agriculture Organisation (FAO)’s food price index has seen an increase of 26% over 2021. The Cereal Price Index has increased by about 30%. 

Prices of wheat – whose supply the war is expected to impact the most – rose by an incredible 61% between January and March this year. The World Bank estimates that it could rise even more. 

Households in some of the world’s poorest communities face crippling hikes in the cost of basic staples such as bread and pasta. 

“We cannot buy chicken, we cannot buy vegetables. We are not going to super markets anymore, we are buying from small mini-markets on loans,” said Ali Chamas, a father of four, including a 12-year-old who needs medical treatment he cannot afford. Unemployed and without an income, he now relies on a food bank in Beirut. 

Rising food inflation is a major cause for concern for food security in India too even as it exports large quantities of wheat to take advantage of the high global prices. Declining incomes because of the pandemic had already raised hunger levels in India. In a survey conducted in February, 45% of respondents reported running out of food in the preceding month. The situation, according to experts, would be even more precarious now because of the spike in prices. 

But, can the rising prices of food be entirely explained by the fundamentals of physical demand and supply? The answer is no, according to an investigation by the Lighthouse Reports, a European nonprofit newsroom. The investigation ‘Hunger Profiteers’ has found that excessive speculation by investment firms and funds in the commodities markets has contributed to the spike in prices. We also found the industry and lobbyists have sabotaged efforts to rein in such behaviour. 

The investigation accessed data that show that in the last two years investment funds and firms increased their stakes in agricultural commodities. The data was also shown to experts and analysts who confirmed that it indicates speculative activity at play. 

Olivier De Schutter, UN Special Rapporteur on Extreme Poverty and Human Rights and co-chair of the International Panel of Experts on Sustainable Food Systems (IPES-Food), said that speculative activity by hedge funds, investment banks and pension funds can adversely affect hunger levels and poverty across the world. “They are indeed betting on hunger, and exacerbating it,” he said, responding to our findings.

The data gathered and scrapped from multiple sources by journalists at Lighthouse and shared with media partners including The Wire, The Continent, Der Spiegel and Follow the Money pertain to agriculture specific index funds and futures contracts of wheat.

Influx of speculators in Europe

In the Paris milling wheat market, the benchmark for Europe, financial speculators’ share of buy-side wheat futures contracts has increased from 35% of open interest in May 2018 to 67% in April 2022. In other words, by April this year, seven in 10 buyers of futures wheat contract were speculators in the form of investment firms, investment funds, other financial institutions and commercial non-hedgers whose aim was to profit from the rise in prices. 

A combine deposits harvested wheat in a tractor trolley at a field on the outskirts of Ahmedabad, India, March 16, 2022. Photo: Reuters/Amit Dave

Between January 2020 and March 2022, investment funds increased their net buying positions by almost four times, data from Euronext, Europe’s leading commodity exchange, shows.

Michael Masters is the founder and chairman of Better Markets and a global expert on the subject of speculation in commodities markets. In 2008, as prices of food spiked, he told a US house senate committee that speculators were buying up essential commodities with the sole purpose of “reaping speculative profits.”

“If speculative actors are most of the open interest, it follows that their incentives and their motivations are going to be dictating price formation. So when they’re the majority of open interest, you get a lot of price formation that has to do with trend following or amplification of price trends,” he told Lighthouse in an interview.

He added that in such a situation, it is likely that the strategy of the speculators is unconnected with the physical supply and demand of the commodity in question.

Breaking the data down, we find that investment firms increased their presence in the buy side of the wheat futures market in Paris from 10% of open interest in 2018 to 30% in April this year. During the same time, investment managers in the buy side of the wheat futures market in Paris from of 5% open interest in 2018 to 25% in April this year.

Jayati Ghosh, professor of Economics at the University of Massachusetts Amherst, has also closely studied the role of speculation in the spike in food prices in 2008, 2009 and 2011. She concurs with Masters that the data from the Paris market points towards speculative activity.

“The fact that these are investment funds engaged in this activity is very important because investment funds have no direct interest in the commodity, they see it only as an asset class. Otherwise, if it’s a grain trader or if it’s anything else they can say, well, look, we are hedging because we anticipate supply shocks because of the Ukraine war. But these are investment funds, that are only interested in financial (speculative) returns,” she told us in an interview.

Also read: The Hunger Crises You’re Not Hearing About

The price of Paris milling wheat increased by a massive 38% in less than two weeks from € 287 per tonne on February 23 (a day prior to Russia’s invasion of Ukraine) to € 396.5 on March 7. Around the same period, investment funds increased their net long positions (indicating a net propensity to buy) by 43%. The price hit a high of € 418 on April 27.

“Given the price dynamics, it is difficult to ignore that that bullish view (of financial institutions in the wheat market) has led to price increases. The financial speculation seems to have exacerbated price dynamics,” David Bichetti, who is an economist at the United Nations Conference on Trade and Development (UNCTAD), said.

A similar story in the US

Data from the US-based Commodity Futures Trading Commission (CFTC) also show increased speculative activity in wheat in the Chicago Board of Trade (CBOT), the world’s oldest futures and options exchanges. 

Net long positions of index funds in Soft Red Winter wheat – typically used to make sponge cakes, cookies and crackers – increased to a nine year high in mid-March. The price, meanwhile,  increased by 75% to reach all-time record highs.

Speculators’ long positions (buying positions) currently make over 50% open interest in Hard Red Winter and Soft Red Winter although in terms of total speculator share of open interest, the current levels are not especially high.

Managed money have been buying long futures contracts of Soft Red Winter wheat following Russia’s invasion of Ukraine. Together with swaps dealers, they owned 58% of long futures-only contracts, their highest combined share since 2014, just as Chicago wheat hit its peak in early March.

”This is a strong indicator of excessive speculation,” said Steve Suppan, policy analyst at the Institute for Trade and Agriculture and Trade Policy and a leading global expert on speculation in food markets.

Money managers also hold record levels  of Minneapolis wheat futures and options, increasing their net positions by 180% between mid-February, before the war started, to April 19. Reuters reported similar findings across grains and oilseeds.

The net long of 19,867 contracts means that money managers had entered legal agreements to buy 99.335 million bushels of hard red spring. That equals almost 20% of the total harvested crop of 2021. 

Dr Lukas Kornher, who is project coordinator at the Center for Development Research at the University of Bonn, said that the increasing share of non-commercial trading increases the risk that traders’ behaviour is decoupled from fundamentals, and driven by financial strategies – leading to food price spikes and increased volatility.

“There is the risk that excessive speculation already contributes to food price volatility and spikes. Policy action cannot wait for ex-post analysis,” he said. 

FILE PHOTO: A driver unloads a truck at a grain store during barley harvesting in the village of Zhovtneve, Ukraine, July 14, 2016. Photo: Reuters/Valentyn Ogirenko

Agricultural ETFs rake in astronomical sums 

Exchange traded funds, or ETFs, linked to agricultural commodities have also seen a dramatic increase in interest this year. By early April, the top five agriculture commodity-linked ETFs had received US $ 1.3 billion in net flows (or investment).

Of these, just two funds – Invesco’s agriculture fund and Teucrium’s wheat fund – attracted net investor investment of US $ 1.2 billion dollars in the first three months of 2022 compared to US $ 197 million for the whole of 2021.

Invesco’s agriculture fund raked in US $ 273 million on March 7 alone, more than half of the total investment it received in the previous two years (US $ 478 million).

Teucrium wheat fund, set up in 2011, saw net inflows of $ 377 million in March. Its previous monthly record high was $ 17 million in 2016.  

If we zoom into March, the 7th day of the month gains significance. The Teucrium wheat fund saw net inflows of US $ 170 million. This is also the date when the price of Chicago wheat hit its all-time high.

As early as October last year, and months before Russia invaded Ukraine, Teucrium was encouraging investors to profit from rising food prices. “While food inflation threatens to negatively impact the global economy, informed investors could potentially benefit from a trend of rising prices,” a portfolio manager in the fund wrote in a piece on the Teucrium website. 

As The New York Times has reported, the Teucrium wheat fund, whose shares also trade on the New York Stock Exchange like a stock, ran out of shares to sell as demand exceeded supply due to the dramatic increase in flow of funds.

It finds that there are strong indications that “financial investors are cashing in on rising food prices.” The IPES-Food report also cautions that with multiple factors at play and the situation still unfolding, it might be too early to say to what extent speculation has driven up prices. In addition, lack of transparency in the grain markets make it difficult to establish to what extent the current crisis is speculation-driven, it added.

It finds that there are strong indications that “financial investors are cashing in on rising food prices.” The ISEP report also cautions that with multiple factors at play and the situation still unfolding, it might be too early to say to what extent speculation has driven up prices.

“The share of speculators (i.e. non-commercial managed money operators) in the wheat and maize markets has increased markedly since the end of 2020, when the pandemic started to drive food prices up,” the report notes. 

We have been here before 

The ISEP report also points out that the share of speculators holding buying positions in the market has reached levels that were seen during the 2007-2008 food crisis when prices rose steeply. 

International prices of maize rose by 70%, rice by 180%, and wheat 120% compared to their levels in mid-2007. At least 40 million people were pushed into hunger as a result. Some later simulation models put this figure at 63 million, and said poverty rose by 100-200 million people.

Michael Masters, in his testimony to a US senate committee said that institutional investors had contributed to food and energy inflation. “Institutional Investors are one of, if not the primary, factors affecting commodities prices today,” he said arguing that supply pressures could not account for all of the increase in price. 

In a 2009 paper, Jayati Ghosh too pointed out the role of speculative activity in raising the prices of food in 2008. Pointing to the volatility in the prices of food, she wrote: “Such wild swings in prices obviously cannot be explained by short-term supply and demand factors or any other ‘real economy’ tendencies. Instead, these acute price movements are clearly the result of speculative activity in these markets.” 

She told The Wire that the prices were not being led by fundamentals of demand and supply in 2008, much like today. “It wasn’t a global production issue in 2008, and it is not really a global production issue today.”

As the chart above shows, prices have seen extreme volatility even as production of cereals has steadily increased in the last 20 years. The stock to use ratio of cereals has also not shown any dramatic declines to account for the dramatic increases in prices in 2008 or now. 

As per latest estimates of the FAO, issued on April 8, .i.e after Russia’s invasion of Ukraine, the stock to use ratio will decline only very marginally in 2021-2022. 

The world’s cereal production will, in fact, increase from 2.78 billion tonnes in 2020-2021 to 2.8 billion tonnes in 2021-2022. Even the estimated output of wheat for 2021-2022 is down only marginally from 776.6 million tonnes in 2020-2021 to 776.5 million tonnes. 

So, much like in 2008, the extent of food price rises cannot be explained by shortfalls in supply of food. 

But, the food security situation this time around is worse that it was in 2008, Ghosh said. “Because along with the food price increases, you have livelihood collapses and wage income collapses in most of the developing world. So you’re talking about people with lower money incomes facing even higher prices. It’s much worse than 2008.” 

To make matters worse, the food price spikes are coming at a time when the global economy has suffered for the last two years. Many food import-dependent developing countries – like Lebanon – are in financial turmoil due to currency devaluation and declining foreign currency reserves. 

“In terms of your own currency, you’re paying even more. So your ability to buy food in the world market is constrained. You have food importers impacted very clearly,” Ghosh said. 

Regulatory Failure

After the 2008 crisis there was public and political support for commodity markets reform. In both the US and the European Union, legislators passed laws which aimed to combat excessive speculation. 

But on both sides of the Atlantic, regulators failed to enact rules they had been tasked with. 

In the United States, the Dodd Frank Act tasked the Commodity Futures Trading Commission to introduce “position limits” –  limits on the contracts which could be held by individual traders and classes of traders, such as index speculators. But the International Swaps and Derivatives Association (ISDA), a lobby group whose members included Goldman Sachs, Bank of America, and Deutsche Bank filed a successful lawsuit against the commission which prevented it from introducing its intended limits.

Documents obtained by Lighthouse Reports show ISDA and its members Goldman Sachs, BNP Paribas and Citi lobbied European regulator ESMA to weaken similar rules being drawn up in the EU.

When the CFTC introduced a new position limits rule in the last months of the Trump administration in 2020, then-commissioner Dan Berkovitz (now the boss at the SEC) wrote that the rule “fails to achieve the most fundamental objective of position limits: to prevent the harms arising from excessive speculation” and that it, “appears more intent on limiting the actions and discretion of the Commission than it does on actually limiting such speculation.”  The other dissenting judgment was from Rostin Benham, now the CFTC chairman. 

The CFTC declined to comment for this article. 

Dennis Keller, CEO of Better Markets, told us the rule was a “fraud on the public” which “had all the appearance and all the claims for putting in place an effective position limit regime that would reduce speculation and eliminate excess speculation when in fact, it did just the opposite.” 

De Schutter said the biggest failure from the 2007-2008 crisis was “failure to really ensure transparency and oversight of commodity markets”. 

“There should have been more distinction between traders hedging against genuine commercial risks versus nontraditional, market momentum-based speculators. There should have been more fundamental recognition that food is not a regular commodity like gold to buy and sell, it is a basic human necessity.”

The Dow Jones Industrial Average is displayed on a screen after the markets closed at the New York Stock Exchange (NYSE) on December 17, 2021. Photo: Reuters/Andrew Kelly

The investors profit, the people suffer

According to the UN Food and Agriculture Organization (FAO), food prices are 34% higher than this time last year and have never been this high since 1990, when the FAO started recording them. The World Bank estimates warn that for each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide. 

The most immediate and tangible impact is going to be on people’s ability to feed themselves and their families, aid workers told The Wire and Lighthouse Reports. 

This will particularly affect poor households, regardless of where they are, but the impact could be even harsher in developing, import-dependent nations, they said.

Knut Andersen, who heads the livelihoods and food security programme at international aid agency Norwegian Refugee Council, said they’re already seeing people being able to buy less food with the same amount of money in the countries they work in.  

“We spend a fairly low percentage of our income on food, but in the countries where we are working, it can easily be 60%, 70%, 80% on food. People are already spending the vast majority of their income on food and when the food prices are increasing, this percentage will be even higher or they will have to reduce the amount of food that they are actually consuming.”

Laila Al Amine, country director of Mercy Corps, Lebanon agreed.

“The minimum wage in Lebanon was the equivalent of $400 a bit more than two years ago. And now it’s equivalent today to about $20 – $25. So the minimum wage is still the same in the local currency, right? But it has lost so much of its value, while in parallel, the food prices have increased dramatically,” she said.

“(Poor households) are incurring debt to be able to afford food because they’re not able to cover their daily needs. It also means reducing the number of meals they are having per day. They’re also reducing the quality of the meals. So the meals are less nutritious. In some extreme cases, we also have families that are taking their children out of school and even getting children married at a relatively early age because sending your children to school also has a cost.”

Reine Tanous, a 22-year-old university graduate in Lebanon, said her family used to eat meat every day but they now only consume it once a week. She has also given up one of her favourite treats – chocolate.

Many others fare even worse. Dalia, a mother-of-five from Cairo, Egypt, said they’ve had to drastically change their diets. They’ve stopped eating meat and she has become anaemic, an indicator of poor nutrition.

And therein lies the rub. Both governments and the media are fixated on large-scale protests and unrest caused by food price rises. Yet while the spectre of food riots loom large, not all impacts will be immediately visible, experts warned. 

Beyond immediate food shortages is something longer-term and equally concerning that experts call “ hidden hunger”. Also known as micronutrient deficiencies, it occurs when there is insufficient consumption of vitamins and minerals to sustain good health and development. This can happen to both children and adults. 

The effects of hidden hunger can be devastating, including mental impairment, poor health, low productivity, and even death, according to studies

It could also lead to a vicious cycle of malnutrition, poverty and hunger that can continue for generations. This is because malnourished girls tend to become malnourished mothers and give birth to malnourished children, compromising their physical and cognitive development. 

Margot Gibbs is an investigative reporter specialising in finance, corruption and the environment. Thin Lei Win is a Rome-based journalist specialising on food systems and climate issues. Kabir Agarwal is an independent journalist who has covered policy, food security, climate issues and agriculture for The Wire.

Hunger Profiteers is a collaborative investigation led by Lighthouse Reports featuring five international news organisations. 

The Euronext data used in this article went through a minor methodological change to correct for an error. The article was updated on January 16, 2022 to reflect those changes.