JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore.
Today we’re going to look at the impact of derivative and insurance markets on farmers and people facing food insecurity in the developing world.
Now joining us is Sasha Breger Bush. She’s a lecturer at the Josef Korbel School of International Studies at the University of Denver. She teaches courses on the global economy, development, and food and farming. Her latest book is titled Derivatives and Developments.
Thank you for joining us.
SASHA BREGER BUSH, LECTURER INTL. STUDIES, UNIV. OF DENVER: Thank you for having me.
NOOR: So can you explain this link between derivatives and insurance markets on people facing food insecurity in the developing world, as well as farmers? And could you even start off by just explaining what a derivative is for those of us that might not be aware?
BREGER BUSH: Absolutely. Sure thing. So a derivative is a financial contract. And the derivatives are derived from an underlying market, hence their name derivative. Now, derivatives can be based on all sorts of different commodities, assets, indexes and rates, everything from gold and coffee and corn on the one hand to oil and interest rates and the Dow Jones industrial average on the other. We trade a lot of different derivatives on a lot of different kinds of markets all over the world.
Now, despite their diversity, derivatives usually serve two functions. The first is hedging, and the second is speculation.
A hedger might enter the derivatives market in order to reduce the risk that they face elsewhere in the economy. And historically farmers have used agricultural derivative markets to create a kind of–to buy a sort of insurance on these markets to protect them from price fluctuations. So, for example, if a farmer is worried that the price of his crop will fall over the next six months, the farmer can sell his crop short, meaning that he sells it in advance for a predetermined price. And this allows farmers and other actors in the food system to get a little more security, a little more certainty in regard to their operations.
Now, historically, as well as currently, we also see speculators playing a big role in the marketplace. Speculators, rather than reducing risks, are looking to take on risk in the marketplace in the interest of turning a profit.
So that’s basically how the two different kinds of players in the markets and the functions the markets serve.
Now, what we’re starting to see over the past 10, 20 years or so is that the number of speculators and these markets have been increasing enormously. There’s a huge amount of speculative activity, and particularly since the financial crisis in 2007 and 2008. We’ve seen many financiers and financial institutions rushing headlong into these markets in the interest of making profits and balancing out losses in their portfolios from other sorts of investments. And this has created all sorts of problems for farmers as well as for consumers in the food system, because the more speculation there is in these markets, the more volatile prices become, and volatility, when prices rise too high, is very detrimental to consumers, particularly poor urban consumers and poor rural consumers. I mean, on the other hand, when prices fall very quickly, the other side of volatility, rural livelihoods and farmers, particularly small farmers, are thrown into tumult as well. So either side of the volatility coin is detrimental to somebody in the food system. And this is why historically we’ve tried to maintain more stable food prices. And derivatives markets are kind of throwing a monkey wrench into price stability these days.
NOOR: So explain how this is facilitating a transfer of wealth from farmers in agriculture to the financial sector.
BREGER BUSH: Absolutely. So the derivatives markets, what we see, I mean, agricultural derivatives markets, this is providing a context within which financial institutions and financial actors can make enormous profits by betting on the prices of commodities. And we’ve see financial firms the world over raking it in since 2006 and 2007 as a consequence of their derivatives trading. So this is the one side of the system, the financial context within which people are making lots of money off of derivatives.
On the other hand, the more speculative trading there is in the markets, the more volatile food prices become. And the costs of volatile food prices are borne disproportionately by the world’s poorest actors, for example poor urban consumers or poor farmers. Risk and volatility generally hit the poor hardest. And given that the poor spend much more of their income on food than we do in wealthier countries, the impact of rising and volatile food prices is greater for them as well.
So we have some actors profiting off this volatility, and we have other actors really losing as a consequence of this volatility. And it seems to me that it represents, when you look at who those parties are, this represents a transfer of wealth from the poorest actors in our food system to some of the wealthiest actors in the financial system.
NOOR: So on June 12, the Commodity Futures Trading Commission implemented part of Dodd-Frank, the financial reform which requires mandatory clearing of derivative markets. However, Wall Street lobbyists are already at work trying to water down some of these reforms. Talk about the impact and if they’re going to be successful.
BREGER BUSH: Sure. In regard to bringing OTC derivatives into organized clearinghouses, I think this is a wonderful idea. I think it’s pretty inadequate, though, while it’s a step in the right direction. The idea with bringing OTC derivatives into the clearinghouses is the idea that this could mitigate counterparty risk. So by facilitating trades vis-à-vis a clearinghouse, you have an entity that can pay the winners in the market even if the losers default. I mean, this was a problem that we saw in the context of credit default swaps and AIG defaulting on its commitments to other actors in the financial system. And so, in terms of adding stability to the financial system, I think bringing OTC derivatives into the clearinghouse system is a wonderful idea.
However, in the context of commodity speculation, I think that regulation has been slower and certainly not severe enough. I would like to see much stricter position limits on speculative positions. Up until this point there has been an exemption on position limits for commodity index swap dealers, and I think that that loophole certainly needs to be closed, along with a number of other measures to limit the extent of speculation in the marketplace. Again, those in the market who are least able to bear volatility and risk are having it foisted upon them by actors that are very wealthy, very powerful, and very sophisticated. It strikes me as a really clear-cut case of injustice.
NOOR: And if the regulation is lacking and you have the impacted populations that are already the most marginalized and with the least political clout as far as influencing policy, what is it going to take to remedy the causes of this redistribution of this increasing food scarcity?
BREGER BUSH: You know, what’s very interesting is that I think we in the United States, as well as regulators in Europe, could really take some interesting lessons from new exchanges and regulators in the developing world. In the Chinese and Indian cases, we see much more severe regulation of speculative instruments and speculative traders in the marketplace. And so I think that moving forward we have actually a number of examples out there about what better regulation could look like.
In addition, I think that looking at the derivatives side of things is really only part of the problem. We have a global food and agricultural system that is marked by price swings and volatility and risk. And so at the same time as we’re curbing the sources of this risk and volatility, in this case derivatives and speculators in those markets, on the other hand we also need to be working to create a food system that is kinder, right, to the most marginalized in it. So how do we create a food system that is less prone to volatility, less prone to risk, and that affords risks management opportunities to everybody, whether they’re big or small, rich or poor, sophisticated or inexperienced? That seems to me to be a place where we can make an awful lot of headway.
NOOR: Sasha Breger Bush, thank you for joining us.
BREGER BUSH: Thank you very much for having me.
NOOR: And thank you for joining us on The Real News Network.
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