Background: Food speculation – the facts

Extensive research informs our measured judgements – we apply this principle to the intensely discussed topic of food speculation as well as others. It’s easy to make superficial judgements – but upon closer examination, the issues are more complex. Broad or yes/no answers cannot suffice.

This is why Deutsche Bank set up a working group as early as 2011. Experts from finance and agriculture were asked to clarify whether a direct, demonstrable link exists between agricultural finance products and price volatility, or even increases in price.

Pending the working group’s report, we took a precautionary measure in March 2012, suspending the introduction of new exchange-traded products based on food staples trading.


Findings of the working group

The report sets forth highly interesting results. The working group states that the results of food speculation are by no means all negative. According to group member Dr. Claire Schaffnit-Chatterjee, “There is no clear evidence that investments in commodity futures markets drive up prices long term. For farmers and food producers, these investments actually offer numerous advantages. “ As a result, Deutsche Bank is now again offering customers investments in the agricultural market and will continue to do so in future. The findings of the working group answer frequent questions.

1. Deutsche Bank is active in and around the agricultural sector. Why, and how exactly?

Agriculture is a key business sector all over the world, but its efficiency varies from region to region. In developing countries alone, annual investments of over 80 billion dollars are needed to grow businesses and yields – an important step towards meeting rising demand.

This demand is set to grow further in coming decades. Financial investments are not always linked to ’food speculation’, since capital is urgently needed for too meet this demand, which includes activities such as investing in infrastructure. This is why Deutsche Bank is active in the following sectors:

  • Through exchange-traded funds on agricultural indices, our customers invest along the entire production chain, from sowing through processing to sales. These ’investments in the future’ support innovation and new Technologies – and of course offer interesting yield opportunities too.
  • Agricultural businesses, food producers and trading companies receive the capital they need to grow and develop. Deutsche Bank also offers loans and finances this growth – for customers all over the world.
  • Transactions to secure prices reduce the risk of price fluctuation. Growers and processors use these contracts to help them safely plan for the future. The futures market gives them the assurance that they will be able to sell their products at a pre-arranged price.

Discover what roles market actors – including Deutsche Bank – play here: 5. Who are the actors in food markets?


2. Why does Deutsche Bank still offer these financial products? Surely they make food staple prices fluctuate even more?

Not so. “Our working group researched these questions intensively,“ explains Claire Schaffnit-Chatterjee, Senior Analyst of macroeconomic developments at Deutsche Bank Research. “Like most other publicly available studies, our research found no clear link between investments in commodity future markets and rising prices or price volatility.“

In fact, prices fluctuate due to other influences entirely. The Sunday edition of Frankfurt Allgemeine Zeitung ran a provocative headline asking “Are Speculators to Blame for Hunger?“ The answer is clear: experts agree that the world’s growing population is a key factor for the rising demand on food staples. “But growing income in many countries – a good thing in itself – drives considerably higher demand too, especially for grain and meat, “ adds Dr. Schaffnit-Chatterjee.

Yet, supply cannot keep pace with these developments. Here are a few reasons why:

  • Climate change has a tangible impact, and will cause problems for agriculture in the long term as more harvests fail due to drought or heavy rainfall. Developing countries are not the only ones affected. Even the USA, the world’s biggest exporter of corn, is prone to short term climate shocks. After a wet spring, growers have to sow later – and accept lower yields as a result.

  • In many places, water is so scarce that there is not enough to irrigate land properly. At the same time, this is a challenge for new technologies that are advanced through investment. Particularly in developing countries, infrastructures are underperforming. As a result, farmers are not harvesting the full potential of their fields. Here, too, investments help boost agricultural yields.


3. What benefits arise when banks and investors operate in the agriculture sector?

The main benefactors are agricultural businesses and food producers, for the following three reasons:

  1. Food futures markets are an effective way to insure against price volatility. This means farmers can plan prices and income more reliably.
  2. Since agricultural businesses can predict the situation that will arise post-harvest, they have more security in planning long term.
  3. This security in planning helps them schedule (or postpone) investments even more accurately. Using the prices on the futures market, they can evaluate whether their income will cover not only the seed for next season, but also allow for investments in buildings or technology. Without this security in planning, many investments would never be possible at all.
These three reasons convinced us to lift our temporary ban on new exchange-traded products based on soft commodities. Our working group sees no logical reason not to offer investment products in the agricultural sector. When creating new products, however, we check carefully to make sure their investment strategies are not conducive to price spikes.

4. High food prices are the reason many people go hungry. Is food speculation the real cause?

The main cause is not food speculation, but the interaction between the two facts explained below. This interaction distorts the relationship between supply and demand even further.

Fact one: the middle class is growing fast in many countries, particularly in emerging markets. While this is good news in itself, it also increases the demand for certain foods, such as meat. Since it takes 200 to 500 calories of grain to produce 100 calories of meat, high-performance agricultural structures are required.

Fact two: high-performance agricultural structures are precisely what many developing countries lack. The threat to supply comes not from food speculation but from central regulation of cultivation and distribution in many developing countries. Outdated cultivation methods prevent higher yields and agriculture cannot react to extreme weather conditions caused by climate change. Modern storage and transport facilities for food are also lacking.

Many experts, including consulting company McKinsey, predict a global population of 9 billion by 2050. The challenges ahead for agriculture are clear: improved technology could significantly increase agricultural yields. If farmers could earn more from their harvests, they could buy better equipment. That in turn would increase the size of their harvests and help to meet the growing demand. Without significant investments in agriculture, supply will not adapt to demand, and prices will rise. Claire Schaffnit-Chatterjee of Deutsche Bank Research sums it up as follows: “Increasing long-term food supply should therefore lead to lower prices and less poverty.“ So long term, more people will be able to afford food instead of facing hunger.


5. Who is involved in the food markets? Speculation and investment – what roles do the actors play? Is there a risk of excessive speculation?

Whether it is precious metals or corn, wheat or soy, speculative investors help commodity markets work properly. Producers and processors rely on futures contracts to insure their risk – and that only works if investors, exchange brokers and traders are involved too. That way, there is never a shortage of sellers or buyers and the market is liquid. The more market actors are involved (and the more diverse their strategies and investments), the more liquid the market is – and the more likely it becomes that market activities will be effective and transparent.

The advantage for agriculture is that producers can use developments in price to deduce how scarce or plentiful foodstuffs are. This improves their planning security – for example when considering investments in new technology to boost yields. Producers also use the markets to protect themselves against price volatility.

In-depth scientific research has been conducted on the role of the finance sector in future markets. No logical, robust proof was found to support claims that investments were excessive or unrestrained. Economists also found no robust indications to support the simplistic equation ’food speculation = rising prices’.


6. Have commodity prices grown detached from supply and demand?

No –agricultural markets operate just like any other market: pricing occurs when supply and demand find a balance. Until that happens, it is normal for prices to peak and trough.

So buying and selling in commodity markets would only cause prices to increase if someone actually demanded delivery of the commodities, i.e., purchased the physical product. But the financial sector only trades with futures contracts, not products. For details, see question 4. At present, there is no scientific proof that investors create extra demand. One important reason is that like many listed funds, index funds for soft commodities do not deal in grains of wheat.


7. But surely speculating on soft commodities pushes up prices in local markets?

Here as elsewhere, prices are based on supply and demand (see also question 6). Many factors influence this relationship. Predicted or actual harvest volumes are particularly important; demand and storage levels of food and commodities play a role, too.

Prices often change significantly when trading is restricted. Infrastructures (i.e., path to market) can be a key factor here, while artificial obstructions such as trade restrictions and duties also contribute. One-sided political export restrictions often lead to significantly higher price volatility.

The rice example: there are no futures markets for rice (unlike corn or wheat), so no investors or food speculators are involved. Yet, rice prices fluctuate in the same way as prices for corn or wheat.


8. Do we need more regulation in derivative markets? Should financiale investments in commodity markets be banned?

At the 2011 summit in Cannes, agriculture ministers from the 20 strongest industry and emerging economies (G20) passed a plan of action to combat price volatility in commodities (See full text at Federal Ministry for consumer protection,food and agriculture). The plan addresses fundamental failings in food production.

At the 2012 summit in Los Cabos, Mexico, this plan was approved and three new topics were added: food security, infrastructure and productivity. The G20 also calls for updated activities to increase transparency and decrease misuse.

Deutsche Bank welcomes these proposals and shares the G20 view that trading needs solid framework parameters to make markets transparent and trustworthy for all stakeholders. This applies in equal measure to all markets, including those for derivates and futures.

However, Deutsche Bank takes a critical view of efforts to limit the number of futures any one market actor can hold (position restrictions). The European Union foresees these restrictions as part of the Markets in Financial Instruments Directive (MiFID). Measures of this kind would limit the ability of banks to offer customers tailor-made transactions.

As the example of the US Commodity Futures Trading Commission (CFTC) shows, position limits are not an effective way to prevent ’excessive speculation.’ The CFTC registers futures transactions in the USA and wished to impose a similar ceiling for options held and futures transactions to prevent uncontrolled speculation. But the commission failed to prove that investments cause sudden price volatility, or that regulations could reduce or prevent it. So, in September 2012, a Washington, D.C. court stopped the ceiling before it was even introduced.


Latest update: October 2013

Claire Schaffnit-Chatterjee

“There is no clear evidence that investments in commodity futures markets drive up prices long term. For farmers and food producers, these investments actually offer numerous advantages.”

Dr. Claire Schaffnit-Chatterjee Senior Analyst of macroeconomic developments at Deutsche Bank Research

Infographic: How do futures markets work?


Learn here how futures markets work and how they can help to avoid risks. more

How do futures markets work? How do they help farmers, food producers and traders avoid price risks and plan reliably? How do they add liquidity to the market? What role do speculators such as index funds play? Find out in the article “Agricultural speculation helps limit risks“.

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