Into the depths of organic products – Organic farming and the effects on animal husbandry

By Anja Rüweling

“The organic market continues growing. Germany has become the largest market for organic products within the European Union”, summarized Ilse Aigner, German minister for agriculture the published data of 2011 about the organic sector in Germany. Organic farming is based on the idea of sustainability, environmentally friendly and nature-orientated farming and the consideration of animal welfare.

 It is the first time that the total acreage of organic farming exceeded 1 billion hectares. According to the annual report of the ministry of agriculture the total organic acreage increased by 3.2 percent while the number of farms raised by 2.6 percent compared to the previous year.
 

The definition for organic farming and the converting of organic products is based on a closed loop recycling management that should ensure the sustainability. High biodiversity in fields and meadows, minimized losses of nitrogen and CO2-fixation through increase of humus are becoming necessary efforts in times of climate change. Their importance and the significance of animal welfare in the modern society are associated with the demand for organic products.

The requirements for organic products are high. Strict guidelines and regular controls on organic farms should ensure the compliance. Nevertheless, in areas such as animal welfare, and concerning health and feeding, the conditions are improvable.

The growing organic market

The proportion of organic farms accounted for 7.5 percent of the overall number of farms in 2011. The share of organic acreage of the total agricultural land has increased by 6.1 percent in the last year. Furthermore, the converting of organic products experienced 4.5 percent growth while organic trading companies recorded a growth of 11.3 percent. In comparison to the previous year the number of importers increased by 8.4 percent.

Although the percentages of organic farming to the total numbers of German agriculture are still small, the growth of this market within the last years will most likely hold on the next years. The German government and the European Union backed this growing market in 2011 with 137 billion Euros in subsidies. Farmers who convert from conventional to organic farming were attracted with conversion bonuses from 210 to 480 Euros per hectare within the first years. Nevertheless, the potential of this market is not utilized yet as the rising demand for its products demonstrates.

Organic market in numbers (Germany 2011)

• 1.022,718 hectare organic acreage
• 22.506 organic farms
• 33.905 organic producer, importer and fabricator
• 137 billion Euros bonuses paid by EU and Germany
• 6.59 billion Euros sales through organic products
• High demand for organic products

According to a survey of the study group “Biomarkt”, the organic market share accounted for 3.7 percent of the total food market in 2011. In addition to the increased import activity, the percentage illustrates a high demand of organic products on the German market. Organic products are popular among younger consumers as the new "Öko-Barometer" study indicates. 71 percent of the respondents under 30 years claimed to buy organic products. This is an increase of 16 percent when compared to the survey of 2010. According to another survey on costumer decisions for organic products, the most given reason with 89 percent was animal welfare, followed by the importance of the price with 71 percent (EMNID consumer survey 2012).

Due to the high-priced feed for animal husbandry and the increased demand of organic animal products both, the retail prices and the sales volume, have raised. Despite higher prices and a higher sales volume, the economic situation in the organic market for animal products is strained. The high costs for feed and medicine restrict the conversion to organic farming to a greater extent.

Regulations for conventional and organic farming 

Animal welfare is, according to the EMNID-survey, the most important motive for buying organic products and is also one of the central goals in organic farming. “The EC regulations on organic farming exist since 1991. They are including all member countries of the European Union to protect the words "organic" and "bio". Since 2001 all organic products that meet the guidelines of the EU are denoted with a single organic label in Germany” explains Prof. Dr. Ute Knierim, professor for farm animal behavior and husbandry at the University Kassel the regulations for organic products.

Farms that use the organic label are checked at least once a year. Large organic farming associations such as "Demeter", "Bioland" and "Naturland" also denote their products with this label. Most of these associations have even stricter regulations and controls which go beyond the ones of the EU.

While the regulations for animal welfare in conventional farming have been improved in recent years, most of them accord now with the regulations for organic farming. The revised EU Organic Regulation (in force since 2009) defined clear objectives for organic animal husbandry and restricted further exceptions. The required minimum size of stables and outlets and the daily grazing, for example, are defined in these regulations.

Moreover, they dictate the exact use of veterinarian pharmaceuticals and the feeding conditions for animal husbandry. While the expansion and discharge of stables and better transportation conditions for animals improved significantly, the regulations for organic feeding and the allocation of pharmaceuticals are causing problems for organic farmers.

Protein-gap as a problem

A 100 percent organic feeding for organic pigs was lately required by law for 2012, but represents some risks to health and product quality for monogastric animals (fowl and pigs). For solving these risks and for a deeper research, the 100 percent organic feed was made mandatory for 2015. Until then, a proportion of 5 percent of conventional protein sources is allowed in the feed ration - a regulation made with regards to the so-called protein gap in organic agriculture. 

Particularly in pig fattening, the amount of flesh is sufficient, because the farmer get paid for this percentage. “The highest amount of flesh can be reached by the right composition of diet. An optimal ratio of amino acids, in first priority Lysine, to Energy in the diet is essential for the pig for growing and run to flesh” explains Dr. Friedrich Weißmann, scientist at the federal von Thuenen-Institute for Organic agriculture. 

Since particular chemical substances in feed are not allowed in organic farming, the suitable soybean meal extract with optimal amino acid patterns is not usable. Instead, the organic farmer uses other protein-containing plants such as soybeans, field-peas, field-beans or potato proteins. Whereas in organic feeding the demand covering energy supply is unproblematic, the demand covering supply of the amino acids presents considerable difficulties due to missing products of organic protein origin and problems on further cultivation options for soy beans in Germany - due to the climate conditions. 

“In general, the organic pigs have two to three percent fewer flesh as the conventional pigs when they get slaughtered. It results in a higher fat content in the pork” describes Dr. Friedrich Weißmann the consequences of the protein-gap in organic farming.

For the organic farmer this results in less profit due to the little percentage of flesh and a higher percentage of fat in the pork which is generally not preferred among consumer, as Dr. Friedrich Weißmann noticed.

Special feed for special pigs 

Heinrich Rülfing is an organic farmer and chairman of the association for organic pig producer in Germany. He converted from conventional to organic pig farming in 1991 and is familiar with the financial constraints. On his farm in the Dingender Heide in Western Germany he manages about 2000 pigs per year under highest organic standards. The units for 1000 pigs are filled with straw, allow for outdoor outlets and some are even equipped with heating lamps for cold days. The feeding on the farm is 100 percent organic says Heinrich Rülfing: “The diet contains organic produced bread, spent grains and soy milk. All these products are delivered by different organic producers in the region.” 

The feeding costs, in addition to the delivery, are high but manageable, says the farmer. The soy provides the pigs with enough protein, however they can not reach the optimal flesh percentage of 56 percent. “The ordinary consumer may prefer lean pork, but the gourmets are coming to my farm to try good, greasy pork.” The farmer is convinced that the organic pork market has the potential for 50 percent more sales, if more farmers, feed deliverer and slaughter houses would specialize in organic farming.“ 

The 2011 data published by the BÖLW (Bund ökologischer Lebensmittelwirtschaft) about the organic pork sector confirm the presumption. The demand for organic meat has increased by 28 percent in 2011. With a growth rate of 0.6 percent the pork sector contributed only with a small part to it.  

The antibiotic treatment 

While preventive treatment is forbidden in organic farming, the pig can be treated with antibiotics in case of disease, but just once in a life-time for animals not older than one year. Results of several studies demonstrated that the pigs would suffer in both, conventional and organic farming and require antibiotic treatment. While many diseases appear more often in conventional farming, other diseases like parasite infestation are likely to appear in organic pig farming. “Generally the frequency of diseases in conventional and organic pig farming does not differentiate. Due to smaller stocks and more outlets, infections in organic farming do not spread that easily. In conventional farming thereby, the hygienic standards are less critical, because of slatted floors” explained Matthias Link, veterinarian on organic and conventional farms since twenty years. According to him, also organic pigs can be carriers of resistant bacteria – a problem that is mainly associated with the conventional pig farming though.  

Once a disease appears a second time and the pig has to be treated, it can not be sold as organic pig anymore. The non-treatment of suffering pigs is highly questionable, anyhow a few “black sheep” of the organic sector use to leave them suffering in order to get the better sales price for organic produced pork. 

The treatment of diseases with alternative medication is preferred and available in organic farming, but is reflected in higher treatment effort and often associated with longer recovering periods of the pigs. 

Are organic pigs healthier?

Heinrich Rülfing experiences his organic pigs being healthier when compared to the situation 10 years ago as conventional farmer: “Since we changed, we use maximum 5 percent of the amount of antibiotics we used to. The guidelines of his farming association “Bioland” dictate a minimum square of 1.1 meters per pig and at least 0.8 meters of outdoor outlet. More space in the stables, discharge and a special air condition system are definitely improving the health conditions for the pigs: “Under these conditions the pigs have less stress and are healthier.” 

While the real health status of organic and conventional pigs has not been proved in a long term study yet, there are still improvements to be done for animal health: Organic protein sources like the soy cultivation in Germany needs to be pushed while research on alternative forms of disease control needs to be tested.

Heinrich Rülfing would decide again for organic farming, even though it is economically risky and associated with a lot more work. That leaves hope that farmers change not only for economic and profitable reasons to organic farming, instead for animal welfare and the general belief in sustainability for Mother Earth. 

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Adding fuel to the fire

by Myriam Wecker

Seldom has a topic penetrated and dominated the public consciousness as actively as the issue of climate change. The European Union in particular is one of the most ambitious political actors worldwide when it comes to promoting greener energy and implementing measures to reduce greenhouse gas emissions. One such measure is a directive which aims at replacing 10 per cent of the fossil fuels used in transportation with biofuels by 2020. The majority of Europeans commend the effort, all the while not realizing that these biofuels are largely produced in developing countries – at a devastating cost.

The sun rises over green fields and lush groves. The workers are getting ready for the day, smiling at the camera as the truck takes them to the jathropa plantation. In the background: the sign of Sun Biofuels: "Sustainable Clean Energy". The film – commissioned and funded by the company in 2010 – emphasises the humanitarian nature of the work Sun Biofuels commits to in Mozambique and Tanzania: offering work to the locals, building roads and wells for the villagers, providing education and medical care for those who otherwise could not afford it. As the narrator explains during the final scenes: "with the vital imperative of business success comes great responsibility to both the people and the environment … A responsibility the company is committed to."

Same company, different film. Damian Carrington, a reporter for the Guardian, went to the Kisarawe district in Tanzania in November 2011 to report on Sun Biofuels´ activities. The picture could not be more different. No picturesque landscapes and happy workers. The land is arid and almost 93 per cent of the villagers are unemployed. There are no schools in the village, no health clinics, no fortified roads. Instead of the promised wells, the people got a single hole in the ground which carries no water. Halima Weli, a resident from Mtamba village, complains that with the selling of the land her children will not have anything to inherit. "Whatever you do", she says to the camera, "don´t listen to the white men´s promises!"

In 2009, Sun Biofuels Ltd, a UK-registered biofuel company, began clearing land to establish an 8,200 hectare biofuel plantation in Kisarawe, Tanzania – the equivalent of 11,000 football pitches, which is all the arable land the residents of the 11 affected villages have at their disposal. Three years after the start of the land clearance, the locals are now worse off than prior to the company´s arrival. Tim Rice, Biofuel Policy Advisor for Action Aid, explains that many people have received no or very little compensation for their land taken four years ago.

In August 2011, the situation worsened increasingly.  Like many biofuel companies before it, Sun Biofuels went bankrupt and fired 650 of its 700 local workers. The company was immediately sold to UK-based Lion’s Head Global Partners which decided to scale back the operations to a small pilot project. Only a handful of people are now employed, while the damage to the land is largely irredeemable and the villagers are suffering from food insecurity in a country where starvation and malnutrition are already a life-threatening issue.

Sun Biofuel is only one of numerous European companies that have set out to developing countries around the world in the search of cheap land to produce biofuel feedstock. Corporations such as Portugal’s Galp Energia SGPS SA, the U.K.’s D1 Oils Plc and Agroils Srl of Italy are joining firms from Canada and Israel in buying acreage in Africa, South America and South-East Asia. Sun Biofuel´s mission statement refers to the on-going expansion of the biofuel market and the ever-increasing demands for it as the motivation behind its activities, citing one event in particular: the ratification of the EU´s Renewable Energy Directive.

You reap what you sow – Biofuels and the EU directive

Although biofuels have been widely explained and discussed in the press, the cited Guardian article and the mainstream media have in general failed to explain how the dire conditions created by biofuel companies in developing countries are encouraged and perpetuated by Western mandates and directives.

The above-mentioned European directive stands out in particular. In 2009, the European Union (EU) adopted the Renewable Energy directive (RED) which requires renewable energy sources to constitute 10% of the final consumption of energy for transport in each EU member state by 2020. The EU counts on private companies to cater to biofuel needs and has already given out €88bn in incentives, subsidies and tax relief to the biofuel industry.

Although motivated by good intentions, the directive presents a number of problems. First of all, most biofuels destined to reduce GHG emissions in transportation are so-called first-generation biofuels, meaning they are produced from crops that could otherwise be used for human consumption. Second- and third-generation biofuels are better regarded since they are produced from algae or waste products. However, they require more sophisticated technologies and are more capital-intensive. According to experts, market-scale production of these biofuels will not be profitable for another 15 years.

In view of that, EU member states submitted action plans outlining how they would meet this 10% target in 2010. As Barbara Ekwall, Right to Food Coordinator for the Food and Agriculture Organization of the United Nations (FAO), explains, these plans showed that over 88% of the 10% target is to be met through first-generation biofuels. "Whereas there is a general surplus in agricultural output in the EU," she says, "the production of first-generation biofuels represent a serious risk of food shortage in countries such as Tanzania where populations are dependable on the land to feed their families and themselves." The EU has increasingly come under fire for heavily subsidising its agriculture (€53,500m, or 47% of the EU budget, in 2011), leading to surplus amounts of produce which is then ´dumped´ on foreign markets, creating artificially low global food prices. As Timothy Searchinger, research scholar at the Princeton Environmental Institute, and his colleagues argue in a special report published in Science magazine, the surplus crops, such as sugar beet, could be used to produce biofuels in Europe. Alternatively, part of the subsidies could be redirected to finance better seeds and equipment for farmers in developing countries in order to increase their productivity to the extent that they can "even grow both food stocks and biofuels without the need for additional acreage", as argued by Mr Rice.

Another problem with the directive is the fact that vast acreages of land are necessary to produce the amounts of biofuel required to reach the EU´s ten per cent target. According to the Gallagher Review, an independent inquiry commissioned by the UK government, between 22 and 31.5 million hectares of land could be needed in total to reach the EU’s 2020 biofuel goal. However, Europe itself has less than 300.000 hectares of arable land, meaning that companies catering to the European biofuel needs are bound to take their production elsewhere. More often than not, "elsewhere" turns out to be the developing world. In their attempts to get cheap biofuels onto the European markets as quickly as possible, many biofuel companies make promises to the local communities to get them to sell their land – promises they may not keep, as the activities of Sun Biofuels illustrate.

A further concern is the practice of "land grabbing", where companies acquire strips of land they claim are "unused". They argue that the "grabbed" acreages are lying idle, and might therefore just as well be used for biofuel production. Yet, the World Food Security´s Panel of Experts on Food Security and Nutrition has stated that: "It is often asserted that there is much ‘available’ land in Africa and Latin America. However, there is rarely any valuable land that is neither already being used in some way, nor providing an important environmental service." Similarly, Professor Ralph Sims for the Renewable Energy Unit at the International Energy Agency points out that it is extremely difficult to identify ´unused´ land in developing countries, since "reliable field data is lacking on land tenure structures as well as current land-use through smallholders and rural communities."

Finally, the increased demand for first-generation biofuels has a significant impact on global food prices. The International Food Policy Research Institute (IFPRI) has stated that "in addition to magnifying the tensions between supply and demand, the rigidity of biofuel mandates exacerbates price fluctuations and magnifies global price volatility".

On top of that "biofuels gradually increase the link between energy markets (which are highly volatile) and food markets (also volatile), further increasing the volatility of the latter". A similar report written by 10 inter-governmental organisations including the World Bank and the Food and Agricultural Organisation, concludes that "biofuel production will exert considerable upward pressure on prices in the future".

Too little too late – The EU´s reaction

Evidence of unscrupulous corporate behaviour and the damaging impact of biofuel production on the world´s most vulnerable populations is alarmingly spreading. As the Renewable Energy Directive actively encourages biofuel production, one wonders: why does the EU not step in to mitigate the damage?

Actually, it did. In October 2010, the European Council agreed to add a paragraph to the RED outlining sustainability criteria that biofuels need to meet to count towards the 10% renewable energy in transport energy. The article in question states that the commission has to submit a report to the European Parliament at the end of 2012, and then every two years after that. Specifically, in 2012 the EC is required to report on the following:

The commission shall, every two years, report to the European Parliament and the council on the impact on social sustainability in the [Union] and in the third countries of increased demand for biofuel, on the impact of [EU] biofuel policy on the availability of foodstuffs at affordable prices, in particular for people living in developing countries, and wider development issues. 

Nonetheless, Ronald Steenblik, Senior trade policy analyst in the OECD Directorate for Trade and Agriculture, states that the article presents some serious flaws. One problem lies in the fact that the baseline study for the 2012 report bases itself on data available from 2008. As Steenblik explains, this means that it will not look at biofuels consumed in 2011 and 2012, and that it will not look at biofuels production which is planned or has started as a result of the projected demand for biofuels created by the Renewable Energy directive. As a result, large amounts of land grabs and other negative effects in developing countries will not be covered by the EC’s report unless the biofuels produced reached European consumers by 2010.

Moreover, the report fails to investigate human rights violations linked to biofuel production. Mr Rice says "there is no attempt to examine issues such as, for example, the displacement of people, the impacts on traditional customs, or the loss of livelihoods from the land". He complains that the study "contains nothing on workers conditions, wages, local food insecurity and so on".

Righting the wrong

In recent years, biofuels have come under fire for various reasons, with experts claiming that first-generation biofuels emit as much greenhouse gas as fossil fuels while the production of second- and third-generation biofuels is too cost- and time consuming. Among the emerging criticisms, however, the issue of protecting populations in developing countries must not be neglected.

Article 208 of the Lisbon Treaty states that "the European Union shall take account of the objectives of development co-operation in the policies that it implements which are likely to affect developing countries". This entails that, the EU must not undermine its own development work by implementing counterproductive policies in other areas such as energy. In addition, article 6 of the Treaty specifies that the EU is bound to respect the rights contained in the charter of Fundamental Rights, including the right to property and to fair and just working conditions.

Yet, the people in Kisarawe, and many like them, are left with nothing. Nobody stands up for their right to food and water, to fair treatment, to their land. If the EU is to honour its commitment to supporting development and defending human rights within the execution of all its policies and mandates, it has to implement some changes concerning the Renewable Energy Directive. The EC needs to introduce robust and binding social sustainability criteria for all bioenergy production and pursue all avenues to hold European biofuels corporations accountable for their actions. Only then can the EU stay true to its pledges instead of merely making more "white men´s promises".

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Don’t play with your food

By Dorothee Heymer

Rising food prices made the headlines for the past years and have mainly been led back to natural phenomena - which fit perfectly into the omnipresent discussion about climate change. A factor that has remained widely disregarded is the effect of financial speculations on food prices. Arguments that extensive speculations on agricultural commodities drive the prices of the very commodities are pulling in votes.  

''Corn is a staple food for a majority of Kenyans. Corn flour prices have been escalating for the past three years or more and that has meant cutting down on corn intake. I had to shop for alternatives (…) in cheap supermarkets to save on costs. And if I managed to buy corn flour it had to be a minimum of two packets that I would consume very economically since it became a luxury food item.” (Maren, Student from Kenya)

Maren from Kenya is one out of many who suffer from rising food prices which have continued to soar in the past years. Between 2006 and 2008 the Food and Agricultural Organization (FAO) registered a price increase of 71% for the most essential food staffs. People in poor countries spend an average of 80 percent of their income on food which leaves them extremely vulnerable to price increases. A price increase of 71% leads to approximately 50% in additional expenses in developing households.[1] Consequently, the number of hungry people passed one billion for the first time in 2009.[2] Hunger protests in 61 countries left no doubt about the outrage of the global population.[3]

The 101 of economics…or gambling?!

But what are the reasons for this explosion of food prices which seem to have taken many by surprise? The reasons for the commodities boom go far beyond mere natural occurrences that have put constraints on the supply. On the contrary, an ever increasing demand seems to push prices into dizzy heights.

First of all, the world population is growing by 80 million people each year. The national economies of the emerging markets attain annual growth rates of eight to ten percent and with them the demand for commodities.[4] Simultaneously, more countries are cultivating corn, soybeans or rapeseed to produce biofuel. Its production attributes to half of the increased demand in agricultural products.[5] “Another aspect is the oil price which also has an impact since tractors need fuel and fertilizers contain oil. Rising oil prices also create an incentive to produce more biofuel”, says Leon Leschus, expert for commodity markets at the World Economic Institute in Hamburg (HWWI). In general, the demand increases much more rapidly than the supply which – according to the basic law of demand and supply - causes the prices of raw materials to increase.

Rising food prices cannot be solely led back to an increase in demand but to a capital influx on the commodity exchanges. German financial institutions, such as Deutsche Bank or Allianz, have invested 11.4 billion Euros in agricultural commodities in 2011. In 2008 the number had been significantly smaller at a level of about 2.7 billion Euros.[6] How could investments in agricultural commodities become that attractive? And what does this have to do with their prices rising?

Once upon a time…

…a grain grower in Germany wanted to sell his future wheat harvest to a miller in France. Since he wanted to protect himself from price fluctuations he engaged into a contract with the miller. This contract assured that the grain grower would deliver 50 tons of wheat to the miller at harvest time and get 200 Euros per ton in return. This contract was negotiated by an intermediary bank which charged both, the grain grower and the miller, a fee for matching their bids. In return, the bank compensated either party for potential losses when the prices for wheat would change. The bank hedged the risk for the grain grower in case the prices fell and he would earn less than 200 Euros per ton at the time of the harvest. At the same time, the bank would pocket some of the profit in case the prices would rise and the grain grower could actually earn more than 200 Euros per ton. The same deal was offered to the miller.

Historically, intermediaries, or speculators, are an integral part of the commodities exchange. By acting as brokers they assure that every grain grower finds a miller to protect each other from price fluctuations. “It is a necessary precondition for the exchange that every market participant finds a trading partner as often and as fast as possible”, says Prof. Dr. Stefan Prigge, holding a chair at Hamburg School of Business Administration (HSBA). This abundance of sellers and buyers is known as market liquidity. The speculators themselves are not interested in the physical exchange of the commodity but in the financial profit they can earn from the contracts which came to be known as futures. Back then, commodity exchanges have been dominated by grain growers, millers and the like who tried to secure their business from changing prices. In December 1998, producers and real traders made up 64.6% percent of all participants whereas speculators contributed to only 35.4%.[7]

Who has taken a bite of my bread?

At first, the grain grower and the miller were happy that they could secure their future business. The intermediary bank, however, started to buy more and more future contracts from grain growers all over Europe. Instead of selling the same contracts to more and more millers, the bank put all the futures into a big basket. This was a very smart move from the intermediary bank to do because it could make a lot of profit in case the prices for wheat increased. The move was so smart that other intermediary banks started doing the same. When one bank started to buy a lot of contracts, the others followed to also get a bite of the bread. When one bank suddenly sold a lot of contracts, the others did the same because they were afraid that prices might go down. This, in turn, started to really confuse the grain grower and the miller. Sometimes everyone wanted wheat and prices would rise up and at others times no one wanted wheat and prices would drop. So each year at harvest time they just hoped to have prices on their sides.

The year 2000 has marked a radical change of regulations on the commodities markets. The Commodity Futures Modernization Act in the US enabled more and more speculators to trade with an increasing volume of future contracts. In addition, commodities became popular as a new asset class to reduce risk coming from stocks or the struggling real estate sector. Thus, the market composition has changed completely. In December 2011 the percentage of producers and processors on the commodities exchange decreased to 32.5% and at the same time speculators had a stake of 67.5%.[8] This implies that futures are used less for hedging purposes but as capital investment, mainly in the form of commodity index funds.

A commodity index is like a basket that contains different commodities and reflects the development of the futures prices of these commodities. Banks started to offer their clients to invest in commodities and they continuously buy new futures to feed their index funds; regardless of the actual supply and demand of the commodities involved. “Futures can theoretically be used for speculation purposes only. This means that commodities can be sold without having been bought from a farmer before”, explains Justin Pfitzenreuter, commodity trader at Agravis Raiffeisen AG. The more people invest into index funds the more this drives futures prices and attracts even more investors. For, if the future contracts increase in value, the value of their capital investment will do so as well. These mass movements amplify minor prices changes, which is referred to as a high volatility of prices for futures. By buying contracts for speculation purposes banks and other intermediaries are competing directly with the processors who buy future contracts for hedging.

And they gambled happily ever after…or not?

Coming back to the grain dealer who had observed the price changes on the wheat market for a little while. He started to realize that there were times when everyone wanted to buy wheat and would pay almost any price for it. This was a very good thing for the grain dealer because he could sell his wheat for a higher price during these times. The problem was that it was hard to predict when the banks liked to buy wheat and when they did not. So the grain dealer would sometime wait and store his wheat harvest for some month. He did this because he expected the wheat prices to rise and his revenue to become even bigger in the future.

Speculations have an impact on the prices of commodities themselves. This is often disputed by high-ranking theorists, like Paul Krugman. The winner of the Nobel Prize in Economics argues that future prices do not affect the prices on the physical market, called the spot market.[9]

However, the authors of a study for the International Food Policy Research Institute (IFPRI) in Washington conducted a number of causality tests which indicate that the futures markets analyzed generally dominate the spot markets. Price changes in futures markets lead price changes in spot markets more often than the reverse, especially when examining returns.[10] In line with this, the investment in index funds is also said to drive the prices on the spot market. This was confirmed by a report of the two economists John Baffes and Tassos Haniotis who came to the conclusion that index fund activity played a key role during the 2008 price spike.[11] “The food crisis in 2008 can mainly be led back to constraints on the supply of rice”, says Leon Leschus (HWWI). “Huge amounts of rice were hoarded because people expected the prices to rise and to earn more money for selling the rice later in time.” There is no doubt, that extensive capital investment affects the prices on the commodities market. However, Leschus emphasizes that the fundamental data, such as weather conditions or natural disasters, remain the key factor in determining commodity prices.

The end?

Although it cannot be negotiated that excessive financial speculations have an effect on food prices, the financial market remains widely untouched by regulations. Recent calls to limit the scope of actions for financial institutions on the commodities markets are still far from being implemented. The European Commission (EC) has worked on three draft laws to increase transparency and supervision of the financial markets. They should have been put into practice by 2011 but the revision process still lasts.

A number of publications of non-profit organizations, such as Oxfam or foodwatch, have created public awareness of the topic recently. They managed to put at least some pressure on the financial industry. The heavyweight of the German financial industry, Deutsche Bank, has announced not to launch any new commodity index funds in 2012.  

However, there is a long way to go to find common ground, although it is hard to believe that anyone could object the ultimate goal:  It is one of the Millennium Development Goals (MDG) to reduce the proportion of people who suffer from hunger by half by 2015. Affordable food prices are a key factor to reach that aim and speculations driving prices should come to a halt. Because it is one of the first virtues we all learn: Don’t play with your food!

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[1] Weed 2011: http://www.weed-online.org/themen/english/5021520.html.

[2] FAO 2009: http://www.fao.org/news/story/0/item/20568/icode/en/.

[3] Von Braun 2008: http://www.ifpri.org/sites/default/files/publications/pr20.pdf.

[4] Foodwatch 2011: http://foodwatch.de/foodwatch/content/e10/e45260/e45263/ e45318/foodwatch-Report_Die_Hungermacher_Okt-2011_ger.pdf.

[5] OECD/ FAO 2011: http://www.keepeek.com/Digital-Asset-Management/ oecd/agriculture-and-food/oecd-fao-agricultural-outlook-2011-2020/biofuels_agr_outlook-2011-8-en.

[6] Oxfam Germany 2012: http://www.oxfam.de/sites/www.oxfam.de/files/ 20120511_mit-essen-spielt-man-nicht.pdf.

[7] Oxfam Germany 2012: http://www.oxfam.de/sites/www.oxfam.de/files/20120511 _mit-essen-spielt-man-nicht.pdf, calculation based on data of the U.S. Commodity Futures Trading Comission (CFTC) excl. small, non-reporting companies.

[8] Oxfam Germany 2012: http://www.oxfam.de/sites/www.oxfam.de/files/20120511 _mit-essen-spielt-man-nicht.pdf, calculation based on data of the U.S. Commodity Futures Trading Comission (CFTC) excl. small, non-reporting companies.

[9] Krugmann 2008 http://krugman.blogs.nytimes.com/2008/06/23/speculative-nonsense-once-again/.

[10] Braun 2008: http://www.ifpri.org/sites/default/files/publications/ifpridp00988.pdf.

[11] Baffes, Haniotis 2010: http://www-wds.worldbank.org/servlet/WDSContent Server/WDSP/IB/2010/07/21/000158349_20100721110120/Rendered/PDF/WPS5371.pdf.

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