SOMO released a new report, Feeding the Financial Hype, that highlights the growing evidence that dramatically increased financial investments in commodity derivatives markets over recent years have caused food prices to soar. This has a negative impact on the poorest people, who spend up to 80 percent of their income on food. SOMO calls on European governments to respect the precautionary principle enshrined in the Lisbon Treaty and to act decisively to bring back financial speculation in commodity derivatives markets. The European Parliament currently has an opportunity to do just this by strengthening the proposed Markets in Financial Instruments Directive and Regulation (MiFID and MiFIR).

The SOMO report explains how over the last decade, purely financial speculation in commodity derivatives markets – including derivatives of food commodities – has increased dramatically. Total commodity assets, invested mostly through derivatives, have grown within a decade from a negligible amount of less than US$100 billion in 2005 to more than US$400 billion today. As a result, financial speculators have become the dominant party in many agricultural derivatives markets, holding the majority of the contracts, whereas this level was only 10-20 percent before the year 2000. Financial speculation has been a contributing factor for food prices reaching record levels in 2008 and 2011. People around the world are adversely affected by rising food prices. However, because people in the poorest nations spend up to 80 percent of their income on food (compared to only 10 percent in developed countries), they are affected more adversely than people in richer countries, especially in poor countries that depend on food imports and food aid.

SOMO is therefore calling on governments to act decisively and bring back financial speculation in commodity derivatives markets to the level reached before 2000, using the precautionary principle, as enshrined in the Lisbon Treaty of the European Union.

New legislation on derivatives markets is being decided in 2011 and 2012 at the European level. The increasing transparency of physical food markets and food derivatives markets needs to be regulated, as well as increasing the capacity and expertise of supervisors/regulators that process trade information. New rules should impose a strict reduction on the number of financial speculators trading in commodity derivatives, particularly agricultural derivatives. A financial transaction tax would further reduce speculation, as well as reducing changes in agricultural policies.

The SOMO report can be downloaded here