The rise in prices is aggravating the food shortage in the world, and investors looking to make money from this situation could make things worse.
Food prices rose sharply after that the COVID-19 pandemic disrupted global supply chains, causing shortages around the world. And they rose even higher when Russia invaded Ukraine. Both countries are the largest exporters of agricultural products such as wheat and sunflower oil.
Hungry for raw materials
Investors who have turned to food and other raw materials increase pressure on prices.
Following the outbreak of the war in February, commodity-related exchange-traded funds (ETFs) boomed. In April, investors pumped $1,200 million dollars into two large farm EFTs, in which investment had reached 197 millions of dollars in everything 200, according to a post by Lighthouse Reports, an investigative journalism NGO.
According to the news portal The Wire, in the Paris wheat market, a reference for Europe, a significant increase in speculative purchases of futures was seen.
The activity of the Chicago Board of Trade, one of the world’s leading futures exchanges, also reflects this trend. A recent study by the Development Research Center (ZEF) of the University of Bonn reveals that the proportion of speculators in durum wheat and maize increased with rising commodity prices. The researchers also indicated that futures price volatility had increased significantly since the end of 2021.
Safe harbors
“The increase in speculation increases the risk that the price configuration decouple from market fundamentals”, the ZEF report warned.
In April, investment bank analysts JPMorgan Chase & Co. suggested that commodity prices could increase by up to 40 percent.
In times of uncertainty, traders tend to distance themselves from risky investments such as technology stocks and cryptocurrencies, instead favoring safer ports, such as food and other raw materials, such as oil and fertilizers. But foods, such as wheat and other grains, can also be negatively affected by market insecurity.
“The more uncertainty there is in the market, the greater the demand for risky operations,” Lukas Kornher, economist and project manager of the ZEF. “That’s why we see the influx of speculative operators in the market.”
Problems arise when speculation becomes excessive. The price of raw materials can be decoupled from the physical supply and demand of said products.
Millions of people fall into poverty
The current Inflation and record commodity prices in futures markets point to an expectation of shortages in the coming months, according to Kornher, who thinks the world is probably headed for a food crisis.
2021
The price index FAO’s food supply rose by 36 percent in April, compared with the same month a year earlier, after having peaked historical in March. The World Bank agricultural price index also reached a historical nominal maximum in the first quarter of the year, with an increase of 25 percent compared to to the previous year. According to a World Bank analysis, for every percentage point increase in food prices, 10 millions more people fall into extreme poverty.
Experts have called for protecting food markets from speculation. But they also warn against protectionist measures as a reaction. “We must make sure that countries do not apply restrictions on exports, which would only exacerbate the food insecurity that we are seeing today,” Arancha González, a former Spanish foreign minister, told DW.