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Sasha Breger Bush: In the name of democratizing finance, derivative exchanges are achieving the opposite

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay.

Most people know by now that commodities—that’s anything from iron ore to wheat or milk or any other things that we consume and make things with—are mostly controlled these days by finance. Big banks and big speculators are highly involved in commodity markets all around the world.

Well, there’s been a movement for the last ten years which purports to democratize finance. That’s to allow derivative exchanges to be open to small farmers so they can minimize their risk, we are told. Well, just how democratic is it?

Now to talk about all this we’re joined now by Sasha Breger Bush. She’s a lecturer at the Josef Korbel School of International Studies at the University of Denver. Her research includes global finance, derivatives, social policy, food, and farming. And her recent book is entitled Derivatives and Development. And she joins us from Denver.

Thanks a lot for joining us, Sasha.

SASHA BREGER BUSH, LECTURER, INTERNATIONAL STUDIES, UNIV. OF DENVER: Thanks so much for having me, Paul. It’s a pleasure.

JAY: So, Sasha, tell us essentially why is this supposed to be democratic, and how do small farmers interact with these derivatives exchanges?

BREGER BUSH: Well, so, the argument is that small farmers are exposed to global markets and that global markets are volatile, and so when global prices fluctuate, the incomes of farmers and the livelihoods of farmers fluctuate right along with them.

Now, in the past, government used to protect farmers from some of these fluctuations. But since the late ’80s and early ’90s, we’ve seen government playing a smaller and smaller role as far as risk management goes. And so, many in the development establishment have argued that by trading in derivatives, farmers can get the same kind of price-risk management that they used to get without all the muss and the fuss of government intervention. So that’s basically the argument that we’re [crosstalk]

JAY: So the issue is a small farmer, let’s say they’re producing coffee and they’re expecting to get x up here—I’m showing in my hand up here—for their coffee, except when the coffee’s ready to deliver to market, there’s been a drop and it’s actually down here, and they just did the whole season for nothing—they’re going to lose money. So they need to mitigate that risk. So what’s wrong with the derivative exchange for doing that? Actually, before you tell me what’s wrong with it, just explain how they do it, so people get that.

BREGER BUSH: Okay. So a farmer, if he or she is worried that prices are going to fall, that farmer could enter the futures market and sell their coffee forward, meaning that they sell it at a predetermined price before they’ve even harvested it. So by fixing this price, they may be able to get a higher price, and thus a higher income level, than if they had stayed out of the derivatives market altogether.

JAY: And that’s because a speculator on the other side is actually going to bet prices will go up. So they’re willing to buy this derivative at x price, ’cause they think it’s actually going to be higher when it comes to market.

BREGER BUSH: Precisely right. What the big exchanges do is they match up an investor on one side who thinks prices are going to fall with an investor on the other side who thinks prices are going to rise, and a deal is made between them. So one pays the other, depending on what the market outcome is.

JAY: Okay. So that sounds good. Now farmers have guaranteed price, and life goes on, and now we have a democratic exchange. What’s wrong with all that?

BREGER BUSH: Precisely right. And what’s not to like? Well, there are a few issues that to my mind are really critically important in understanding some non-democratic tendencies in derivatives markets vis-à-vis farmers.

First and foremost, the markets are not necessarily efficient with their price determination, particularly since we’ve seen more and more speculators getting involved in the markets over the last ten years. Prices have been distorted as a consequence, meaning that the insurance that farmers are trying to buy on those markets may not do as good a job as they would have hoped or they might have without the speculators’ influence. So that’s one issue that’s ongoing.

The second issue is that despite 20 years of innovation and trying to create ways for farmers to access these markets, by and large developing country farmers, many of whom are small- and medium-sized, are simply unable to access the markets for a whole variety of reasons—they’re too small, the coffee or whatever crop they’re growing may not be recognized as valid by the markets. We see problems with information and technical access to the markets. So that’s one big issue in terms of democracy, whether these markets are actually accessible, right, as we’re trying to make them to proliferate these products among farmers.

And last, but not least, one issue that really has caught my eye, particularly over the last few years, is, despite all this rhetoric about democratizing finance and bringing farmers into the fold, what we actually see is increasingly concentrated market structures. So while we might see more and more traders participating in these markets, the exchanges and clearinghouses that are actually facilitating these exchanges and making sure that credit risk is managed on these exchanges, these entities are becoming more and more concentrated. So I see this as kind of a democratic facade that we’re trying to get farmers to participate, on the one hand, in the name of democracy, but behind the scenes we’re seeing more and more concentrations of wealth and power—a rather undemocratic trend, in my mind.

JAY: Well, let’s break up two things. Let’s go back, first of all, to one point you made earlier. Now, most small coffee farmers—and this is utter speculation on my part, but I can’t believe most small coffee farmers in Latin America, for example, have ever heard of a derivatives market, never mind have access to it. So we—even at best-case scenario, we have to be talking bigger middlemen of some kind that would even have the lawyers and the means to access these kind of markets, are we not? I mean, an ordinary small peasant farmer can’t have any involvement with this.

BREGER BUSH: Well, precisely right, hence the problem with recommending derivatives markets as substitutes for other kinds of government policies that may better serve small producers. This is a really troubling trend, in my opinion. Governments have backed away from guaranteeing prices to farmers, subsidizing production in the name of neoliberal reform. Yet at the same time, the alternatives, the market alternatives we’re providing to small farmers are utterly inadequate. So we’re creating an environment in which mid-sized or maybe the largest farmers are able to manage risks on derivatives markets, leaving smaller and peasant farmers to become increasingly more marginalized.

JAY: This is sort of what’s—this is to some extent what’s gone on in Canada (we’re not just talking the developing world), where the Harper government’s trying to get rid of—I guess they have now, getting rid of the Canadian Wheat Board. Isn’t it essentially that? They had the Canadian Wheat Board that helped manage risk for Canadian wheat farmers, and now—I’m sorry, I can’t remember now if they’ve actually gotten rid of it now or they’re about to get rid of it. But that’s the objective, is it not, to push farmers into these private markets and get rid of something that most farmers, based on polling, thought was working perfectly well?

BREGER BUSH: Precisely right. And coffee-producing governments, coffee-producing countries had analogous institutions. So there were coffee boards and coffee institutes that served that same role as that Canadian Wheat Board you were discussing. And many of these were dismantled. Most of them, almost all of them were dismantled in the context of structural adjustment and liberalization in the ’80s and ’90s.

JAY: Well, let’s go back to your other point, then, how there’s fewer and fewer of these markets. In fact, in a recent piece you wrote, you talked of how one of the biggest markets just bought the next-biggest market, so it’s even more concentrated. But why does that matter? Who cares how many markets there are? Why does that affect the process?

BREGER BUSH: You know, and by way of analogy, I mean, going into the supermarket, you may indeed be able to pick from any number of different kinds of shampoo. But there are increasingly fewer and fewer supermarket chains where you can actually buy shampoo at all. And I see the same process going on in derivatives markets. We’re seeing a proliferation of products’ efforts to democratize product offerings, but there’s fewer and fewer exchanges and clearinghouses behind the scenes actually offering and facilitating these trades.

Now, this is problematic for at least four reasons that I can think of. First, uncompetitive marketplaces, firms operating in uncompetitive marketplaces can influence prices and contract specifications and product offerings. The bigger the exchange and the more globally oriented it is, the less likely its contracts and its products are to cater to small farmers or to other smaller actors in commodities markets. So that’s one big issue, the manipulation of prices and product offerings.

Second, there’s some evidence to suggest that as the big exchanges get bigger and more liquid and take on more and more traders, now any smaller startup exchange potentially in a developing country would have an increasingly difficult time competing with them. So, the bigger the exchange, the bigger the barriers to entry are for other exchanges, smaller ones that might want to compete with them. So this is also problematic, to my mind.

Third, as we know from the current financial crisis, bigger and large concentrated financial markets undermine stability. We’ve seen this issue of too big to fail constantly coming up in the context of the crisis and folks warning us about the dangers of financial institutions that are too large in terms of global financial fragility and instability. So that’s a third concern.

And fourth, and I think perhaps most important, to my mind, big financial institutions have a lot of political power. And the bigger the institution, the more political influence they may have. And this strikes me also as rather undemocratic.

JAY: Does having less exchanges make it easier for major institutions involved in speculation and derivative plays to influence the price?

BREGER BUSH: I’m not sure that that’s the case. I don’t know that necessarily speculators would find it easier to influence the price, but it is the case—and there are a few instances that I could cite—as larger exchanges try to accommodate their biggest clients. Right? They try to make the environment as conducive to their big clients as they can. And so we’ve seen, for example, on LIFFE, in the coffee context, that the size of the [crosstalk] contract—.

JAY: Life being one of the bigger exchanges.

BREGER BUSH: Exactly. LIFFE is the London International Financial Futures and Options Exchange, and it’s going to be acquired by the intercontinental exchange this year. And so LIFFE recently doubled its contract size for robusta coffee contracts.

Now, on the one hand, this is excellent for LIFFE’s biggest investors, because they wanted a bigger contract, they wanted to reduce transaction costs. But for farmers, potentially, growing robusta coffee somewhere in Sub-Saharan Africa, this creates an even larger barrier to entry, because they’ll have to produce twice as much coffee to be able to trade in one single contract.

JAY: So in fact even less access to this derivatives market that’s supposed to help you manage your risk.

BREGER BUSH: Precisely.

JAY: Right. So, just finally, what public policy would you like to see to help farmers minimize risk?

BREGER BUSH: You know, I think there are all sorts of really incredible alternatives that governments, nonprofits, and farmers could be thinking about as an alternative to derivatives. We have alternative trade networks like Fair Trade. We have real successes in supply management, which are government efforts to manage supplies to keep prices stable. And, indeed, there’s been a revival of interest in supply management since the food crisis has erupted over the past five or six years. We could be thinking about organizing producers into producer unions (this is a model that Colombia has employed really successfully) that give farmers more bargaining power with international traders and with coffee processors as a means to stabilize and raise prices.

And I think that’s probably one of the biggest problems of all this talk about derivatives and farmers, that it’s monopolizing the conversation as well, not just the markets, but the conversation about what kinds of alternatives there are. There are a whole wealth of alternatives out there that have nothing to do with highly financialized and monopolized markets.

JAY: Right. Thanks for joining us, Sasha.

BREGER BUSH: Thanks so much, Paul. I appreciate it.

JAY: And thanks for joining us on The Real News Network.


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Sasha Breger Bush. is a lecturer at the Josef Korbel School of International Studies at the University of Denver. Her research includes global finance, derivatives, social policy, food, and farming. And her recent book is entitled Derivatives and Development.