Deutsche Bank – Responsibility
Süddeutsche Zeitung ǀ August 25, 2012

“False alarm!"

A business ethics specialist has accused Foodwatch and Oxfam of doing sloppy research - asserting that food speculation is not responsible for hunger in the world.

By Andrea Rexer

It is clear that he does not enjoy launching a frontal attack on organisations like Foodwatch or Oxfam. Ingo Pies is not lacking in sympathy for non-governmental organisations (NGOs). The business ethics specialist at the University of Halle founded an initiative when he was still a student. His group “Init” promoted policies intended to prevent drug abuse related fatalities. He emphasises, “criticising political shortcomings is one of the most important functions of non-governmental organisations”, but he maintains that the NGOs are on the wrong track in the case of agricultural speculation. “You cannot blame the banks for rising prices of agricultural products. The speculation alarm is a false alarm,” says the economist. The Foodwatch organisation’s frequently quoted study “The Hunger-Makers” forms the foundation of its campaign against Deutsche Bank, Goldman Sachs and other institutes. Oxfam and German hunger aid organisation Welthungerhilfe also released similar studies. The NGOs’ theory is that banks are driving up prices by enabling investors to invest in commodity products. They assert that this is the reason why people in developing countries can no longer afford staple foods.

Over the course of several weeks, Pies examined the studies and compared them with other scientific literature on the subject. His findings are sobering: “The arguments do not bear up under scientific scrutiny.” It is indisputable that financial market transactions with commodities have gone through the ceiling in the last ten years. Their volume increased from 13 billion dollars in 2003 to 412 billion in 2011. However, no physical oil or gold is traded over the counter in such transactions - and neither is corn or wheat: they are purely financial transactions. “The NGOs regard that fact as evidence that the financial markets have become disconnected from the real markets. But that is an erroneous conclusion,” states Pies. He says that it is completely normal for the volume of financial transactions to be far greater than the volume of the exchange of real goods. To follow his argument, you have to understand how forward trades work. They are similar to the basic products of speculation: they make it possible to bet on future prices. For example, if a farmer expects the price to increase, he looks for an investor that is convinced that the opposite will occur. When the transaction concludes, both parties decide on the price at which the wheat will sell over the counter later on. If the farmer’s price expectation changes during the interim period, he can neutralise the first transaction with a counter-trade and conclude a new transaction – at a new price. Pies argues that the volumes traded on stock exchanges are already multiplied for that reason alone.

However, not just farmers settle this type of financial transaction. Traders frequently conclude bets among themselves. For the NGOs, it is clear that those bets are what is driving up the prices. Pies counters, “For the most part, the studies ignored data that support the opposite view”. He says that speculative transactions would only be able to drive up the prices if stockpiling occurs, “but that has not been observed”. In his view, the price increase between 2006 and 2008 was not a bubble, but instead constituted a real shortage. He says that the price increased simultaneously in the futures and current markets because of crop failures and the production of green fuel instead of food. “That is a clear signal that we do not have sufficient food products. We do have to solve that central problem – but the debate about speculation is not helpful in that respect.” He cites another argument why financial products might not be responsible for the price increase: not all commodity prices included in index trading rose during the period in question. For example, the price of cotton and beef dropped between 2006 and 2008. Rice is another example: it is not included in index trading, but the price increased by 168 percent from 2006 to 2008 nevertheless.

When examining scientific documents, Pies discovered that a similar debate occurred over 100 years ago. Strict regulatory measures existed then and on January 1st, 1897, wheat speculation was prohibited on the Berlin stock exchange. “The impact was disastrous,” explains Pies. The price of wheat jumped up and down rapidly but, because of the regulations, farmers were no longer able to protect themselves against price fluctuations with the aid of financial products. “The day on which a crop was harvested and sold became a game of chance. Corrective measures were implemented promptly and, three years later, the prohibited futures trading transactions were permitted once again. In his view that is a good example of how speculation is economically useful and morally desirable. It allows producers to hedge against risks and investors to earn something by assuming those risks. Speculation is the wrong issue in the debate about hunger. “It is a secondary issue. The NGOs are wasting their moral commitment,” says the business ethics specialist. After all, that there is hunger in the world is not a trivial issue: it is a matter of life and death.