August 19, 2010
Appetite and destruction: global food insecurity and speculation in agricultural commodities
Posted by Erik Gerding

I am in the mode of speculating on the next financial crises or wave of financial litigation. Next to municipal securities (the subject of my last post), I would bet quite a bit of money (borrowed to be sure) that we’ll also see an uptick of government enforcement in the area of agricultural commodities.

Manipulation in agricultural commodities hasn’t been all that sexy since the Duke brothers were busted in Trading Places for trying to corner the orange juice futures market with inside information. If the Duke Brothers were in business today, they would likely gravitate towards the action in financial futures and derivatives, not pork bellies.

Or would they? The media has been awash (from Rolling Stone to The Atlantic to the New York TImes) in the last year with stories on coming global food insecurity. International investors and sovereigns have been reported to be buying vast tracts of farm land in East Africa to satisfy the growing demand for food for countries, like the Gulf States, that don’t have enough arable land to feed their populations now, let alone should food shocks hit. We may have seen a harbinger of things to come as Russia recently shut down wheat exports given the massive drought and fires in that country.

Regulatory scrutiny and enforcement actions in agricultural commodities will heat up for two reasons. First, greater volatility in a given market is not only a boon to traders generally, it also inflates the incentives to engage in manipulation. Of course, the key question is how do we define what constitutes market manipulation.  This leads to the second reason that ag commodities will be a hot legal area: when crises hit, there is a clockwork reflex on the part of politicians and regulators to blame speculators or speculation in general. This often sweeps aside that greedy speculators often help ensure commodities markets function and can even increase the total amount of food being produced. A farmer that can lock in future prices with a speculator may well be more willing to produce more food once he or she can manage their risk with a futures contract with a speculator on the other side.

If you thought that the debate over speculation was heated in the SEC v. Goldman case, wait until there are food shocks, hunger riots, revolution. If financial crises tend to generate legal earthquakes, food crises can overthrow entire political systems.  Food security may not register as a major political issue in the United States, but for the leadership of countries like China and India it may be the most important issue of all.

Of course it isn’t worth inventing a debate on whether a given practice in agricultural commodities markets constitutes manipulation or not absent hard facts. But isn’t the time to start developing the expertise on these topics now – in a (relatively) quite moment? The driving force behind these idle musings as to the next financial crises is not just to while away a humid afternoon, but hopefully to provoke some thought for legal and financial scholars. We’ve learned the hard way that scholarship on financial crises tends to be reactive, meaning we are less than prepared for the next “Big One.”

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