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Nicolas Sarkozy, the president of France, last year compared commodity speculators to the “mafia”. It was a typically over-the-top description of what he saw as near-criminal behaviour at the source of the rising cost of the world's food and natural resources. Sarkozy made tackling volatility in the commodity markets one of the priorities of his country's presidency of the G20 group of rich and developing economies last year and, although only limited progress has so far been made, regulators on both sides of the Atlantic are taking action to place restrictions on the speculators.
The trading of commodities is as old as trade itself. For centuries, traders have bought and sold crops, livestock and other agriculture products. The markets were usually local and the traders had to be there in person. What has changed in recent years is that commodity markets have become global and electronic. They are now, much to Sarkozy's disgust, much like any other financial markets.
It is estimated that more than €300 billion is currently invested in commodities worldwide. For investors, the attraction is that they can use this type of trading to hedge for inflation and make profits from the growing demand for raw materials, notably in the emerging economies.
The appetite for commodity speculation has undoubtedly been increased by developments in arable farming: crops that were once considered foodstuffs are now being used for making biofuel. In turn, land that was used for growing food crops is being turned over to energy crops. The potential for interaction between what were previously separate markets has grown: the price of energy commodities has knock-on effects on the price of cereals and other foodstuffs. This is, as the saying goes, grist to the speculators' mill.
Sarkozy, in one of several speeches he made on the subject last year, said that commodities speculation was “one of the chief dangers threatening growth”. The spiralling cost of raw materials risked “keeping millions of men and women in poverty”, he said.
Business leaders, particularly those that experienced sharp rises in their costs, joined Sarkozy in calling for more regulation. Last year, Howard Schultz, the chairman and chief executive of Starbucks, the US coffeeshop chain, blamed gambling on the commodities market for pushing up the price of coffee beans to a 34-year high, at a time when the difference between supply and demand hardly changed. In April 2011 the cost of a pound (454 grams) of coffee was €1.76, compared to €0.35 only a decade before. “We are experiencing a very strange and almost inexplicable phenomenon in the commodities market,” Schultz was reported as saying. “Without any real supply or demand issues, we are witness to the fact that most agricultural food commodities are at record highs at once.” And the extra money is not going into the hands of the producers but to the speculators, he said.
Similar complaints have been heard in the car industry. Last year, BMW, the German car manufacturer, criticised speculation for driving up the price of aluminium. Whatever the raw material – be it coffee, aluminium, cocoa or oil – it is at risk from those who want to make money from its trade. Sarkozy's response has been to demand tougher regulation of commodity derivatives and greater transparency in the market. He called for every transaction to have a minimum cash deposit to deter risk-takers.
Stricter rules are on the way, primarily through the European Union's revision of its markets in financial instruments directive (Mifid), which is currently being discussed by the EU's member states and the European Parliament. It is broadly in line with Sarkozy's demands.
Although member states and the Parliament must agree before the revision can become law, it is likely that Mifid will bring in new rules for commodity trading known as ‘position limits', which generally restrict the number of derivative positions that a market participant can take during a certain period of time. Under Mifid, the European Securities and Markets Authority (ESMA), the pan-EU regulator, would in extreme circumstances be able to impose limits on commodities positions. Many in the Parliament wish this to go further, by bringing in position limits as a general rule, but this is likely to be opposed by member states.
The rule changes would bring the EU broadly into line with the US, which brought in its own regulatory regime last year.
The tighter regulation is controversial. Traders say that there is no conclusive evidence that their activities result in prices going up. Some experts believe that imposing position limits could in fact do more harm to the market than good. But it is clear that Sarkozy's crusade against commodity speculation is gathering pace.
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