The World Development Movement doesn’t understand speculation

The World Development Movement (WDM), a group that claims to “tackle the root causes of world poverty”, today claimed that the spike in food prices in 2008 was entirely down to “bankers” and called for government regulation of the food industry in order to stabilise prices.

 But this theory, that greedy speculators have caused the food crisis, has many nails in its coffin by now. The Economist recently cited an OECD study that found speculators “not guilty” of causing the price rises in both food and oil. The fact that commodities without futures markets (apples, edible beans) also saw price rises during 2006-08 rather suggests that the sudden price fluctuations are best explained by good old-fashioned supply and demand.

Blogger Tim Worstall adds further evidence: he shows how speculators, by anticipating future supply or demand shocks and buying or selling accordingly, actually bring forward price changes and so give producers and consumers more time to adjust in preparation for the shocks. In this way, speculators can actually reduce price volatility.

WDM is right to claim that the “poorest people...suffered the most” in 2008. Yet their proposed cure, government regulation to stop food price volatility, is worse than the disease. The EU has already tried to stabilise food prices through their Common Agricultural Policy by setting "intervention prices" at which they would buy or sell to keep the price in a certain range. Predictably, under pressure from farmers’ lobby groups, they set prices too high and ended up with massive surpluses. These are then dumped on world markets, forcing down prices and destroying the livelihoods of millions of African farmers, while at the same time keeping prices unnecessarily high within the EU.

If WDM are really concerned for poor people, they should stop indulging in populist anti-market rhetoric and concentrate on the proven causes of high food prices – taxes, export bans and quotas, customs delays and red tape, the CAP, biofuel subsidies… the list goes on.