Big investors are crowding into agriculture and land – By Wolfgang Mulke

It was a small but heartening victory for Foodwatch, a German consumer advocacy group, in its fight against speculation on agricultural commodities. In April, the Deka investment fund unit of Germany’s state-affiliated banks announced it was pulling out of the controversial segment. “We have decided to stop listing the price development of basic foodstuffs such as wheat, soy and livestock,” Deka’s statement said.

Earlier, Deutsche Bank likewise yielded to public pressure. Germany’s biggest bank said it would reevaluate its activities in the sensitive trade of food and refrain from opening any new funds that include agricultural investments during that time.

Investments in the agricultural sector are controversial because they tend to drive prices higher and make food unaffordable for even more people in many countries than is already the case. “The poorest of the poor can no longer afford to eat,” Foodwatch chief Thilo Bode warns.

With a study called “The Hunger Makers,” the former Greenpeace head sparked a lasting debate last fall over speculation on wheat, soy and pork sides. The report says investors are crowding into the agricultural sector and, by their mere presence in futures trading in agricultural commodities, have pushed prices up to 25 percent higher.

German banks immediately rejected the accusation. “Price rises and fluctuations among agricultural commodities are caused mainly by fundamental data such as extreme weather events and the growing demand for biodiesel,” a spokesman for Deutche Bank said. But the financial institutions aren’t 100 percent sure – so for safety’s sake they’ve pulled back from the line of fire.

To be sure, the actual effect that speculators have on food prices cannot be exactly demonstrated. The Berlin-based German Institute for Economic Research (DIW) estimates that about one-fifth of price hikes can be attributed to speculation. The far greater part is due to a set of other factors.

The first of these would be the world’s growing population, which all but guarantees increasing demand. Add to that the rising living standards in emerging markets like China, India and Brazil. The burgeoning middle classes there don’t just want to eat. They want to eat well. That raises demand for meat and dairy products. Making burgers and cheese, however, requires lots of feed grain for the livestock. Also, competition over plowed land and pastures is rising. Farmers can choose between sowing plants for food or energy production. Finally, climate change also adds to price fluctuations, as more frequent extreme weather events destroy large swathes of regional harvests.

This irrefutable and growing scarcity of essential foodstuffs has attracted speculation. Research by Foodwatch shows that investors poured $600 billion into commodities in 2011. Small investors long ago joined the trend with certificates and other derivatives. Big financial companies have even become involved in the physical trade of agricultural commodities, storing barley and corn in their own silos and warehouses.

Some speculation by farmers and the food industry is welcome. It is conducted mainly in futures trading on the Chicago Exchange. The principle is simple. Say a farmer wants to sell several tons of grain a few months before the harvest for a set price. The grain is delivered at a certain point in time. The farmer can then rely on the future revenue, regardless of the harvest’s quality or yield.

Meanwhile the buyer also benefits from the deal. The bakery that buys the wheat on contract can then reliably calculate its production costs.

However, many buyers of contract goods have no interest in the commodity’s actual delivery. They hope for rising prices on the spot market, say because of a crop failure. Then they can sell their contract to someone else at a profit.

As long as the volume traded on futures markets reflected actual agricultural production in the US and elsewhere, speculation remained within the desired parameters. Also, because the number of contracts per trader was limited in the US until 1990, this playground was not attractive for financially powerful companies. Then, deregulation changed the ground rules. And ever since, big banks and investment companies have kept a hand in futures markets.

Derivatives further increase the financial volume of agriculture-based trading. High demand for futures contracts further increases their value. These activities by the finance industry in futures markets affect spot prices – those for immediate delivery – and push up retail prices for food, Foodwatch says. The price of wheat has risen 150 percent in the last decade.

The problem of rising prices has summoned the attention of the G20. Germany and especially France want to take steps against excessive price fluctuation. Many spikes and troughs are sparked by sudden events. When a heavy storm sweeps through Australia, markets immediately expect a bad harvest there. Prices rise instantly.

The plan calls for a new information system to be established. Today, no one knows how much food is produced and stored in the world. A global reporting system would fill that void. Yet analysts doubt that such a system would be feasible. Whether China and India would be willing and able to build up the required infrastructure is questionable, says Germany’s agriculture ministry.

In any case, the game long ago spread beyond futures contracts and grain shipments. A customer magazine of the Royal Bank of Scotland (RBS) recently said farmland is better than gold in terms of investing. The authors name-dropped Warren Buffett and George Soros as people who have diversified into agricultural land.

Landgrabbing has become an especially urgent issue in Africa. Big state investment funds including China’s are buying up land there. Between 50 and 80 million hectares of land were sold in recent years to foreign owners, the German Agriculture Ministry estimates. That equals the entire territory of France plus a big chunk of Germany. In tough negotiations the members of the UN’s Food and Agriculture Organization (FAO) have proposed a kind of code of conduct for approval in May. “Private investors cannot be allowed to violate the human rights and land rights of the local population,” says Germany’s Agriculture Minister Ilse Aigner in summarizing the goal. Buyers of farmland and pastures would have to agree to the guidelines.