Dialog with our critics about agricultural futures markets and food supply

For some years, there have been intensive and controversial discussions about the impact of futures market products on the prices of agricultural commodities and thus on the possibilities of supplying food especially for poor people. Against this backdrop, Jürgen Fitschen, the Co-Chairman of Deutsche Bank, invited about 40 representatives of churches, non-governmental organizations as well as the political, business and scientific sectors to participate in an open, but not public full-day dialog on April 16th, 2014, in Frankfurt am Main. With the guidance of a neutral moderator, a large amount of common ground was identified, and existing differences of opinion were also revealed. In addition, individual thematic focus areas were investigated in greater depth in three parallel working groups.

A consensus was reached on the view that there are many fundamental causes for the hunger problem complex in the world: for example, they include the growing population of the planet, low productivity of agriculture in many countries, inadequate infrastructure for transporting and storing food, the increasing frequency of extreme weather conditions (drought, flooding) and geopolitical crises. There was also agreement on the fact that - as a matter of principle - the futures markets for agricultural commodities fulfil an important insurance function for the producers and purchasers of agricultural commodities, which must be preserved. At the conclusion, the participants “agreed to disagree” about their assessment of the impact of financial investments in agricultural futures markets on people suffering from hunger. In this context, one important problem is that the quality of the market data is regarded as inadequate.

Differences and common prospects

There was clear disagreement with respect to the differentiation between useful safeguarding of individual market participants on the one hand and allegedly useless or excessive speculation on the other, which some people regard as being responsible for short-term price peaks. In this context, a difference was made between speculative storage, which has an impact on prices in the short term (if the commodity is perishable), and financial speculation in the futures markets: the effect of the latter on the spot markets has been examined in numerous studies – with results that differ diametrically. Those who criticize opening the futures markets for agricultural commodities to investors demanded that the “precautionary principle” be applied when the evidence is flimsy, which would mean immediate discontinuation of those investment products if there were the slightest suspicion of a harmful effect. There was no answer to the question of whether implementing such a step might trigger other negative consequences and in particular if it might be detrimental to the insurance function for market participants.

With a view to the future, it was generally agreed that increased market transparency is desirable, that determining the cause of substantial price fluctuations in a timely manner is helpful and also that more investment money should be directed towards the production of agricultural commodities in developing countries, which is what Deutsche Bank has done together with the German Federal Ministry for Economic Cooperation and Development and the KfW development bank in the case of the Africa Agriculture and Trade Investment Fund. However, sustainable investment in the agricultural sector is still a rarity. Therefore, investing in agricultural index products might serve as the entry path into the sector for institutional investors and pave the way for further investments in the real economy. Targeted investments are necessary primarily for water, road infrastructure, storage as well as productivity in Europe and Africa. Thinking about how the precautionary principle is supposed to be adequately applied by financial service providers would also be desirable, including the question of whether there might be investment products that are “better” that the existing ones. In this context, the fact that Deutsche Bank has already excluded investment strategies for agricultural derivatives that might potentially reinforce certain price trends (“momentum strategy”), even though there is no clear proof of such an effect, is worth mentioning.

The event made a contribution towards improving understanding of the opposing positions and identifying specific issues that are worth examining in greater depth.

Dialog with our critics about agricultural futures markets and food supply