As poor countries struggle against soaring food prices, the World Bank is pushing a plan to keep speculators from taking advantage and getting rich.
The plan, which was recommended to the leaders of industrialized nations at the G8 summit in Toyako, Japan, would establish an international strategic food reserve to meet emergencies.
In a letter to Japanese Prime
Minister Yasuo Fukuda, the summit host, the World Bank's president Robert
Zoellick urged study of the plan for a "virtual" reserve to fight
market speculation that can drive food prices to dangerous levels in futures
"Absent such a step, the breakdown in international food markets is likely to prompt an ad-hoc building of stocks, perhaps further boosting prices, and the international community may not be able to access food for those in critical need," Zoellick said.
Officials believe that speculation played a part in just such an episode in
March when rice prices doubled to over $600 per ton, threatening World Food Program (WFP) deliveries to 450,000
children at Cambodian schools. Rice prices kept climbing to over U.S. $1,000 per ton
as at least 26 countries imposed export restrictions to preserve domestic
Prices have since subsided to U.S. $725 per ton for Thai B- grade white rice, but
that is still far more than many of the world's poor can afford. The World Bank estimates that the combination of high
fuel and food prices may force over 100 million people into "extreme
The bank is backing a series of direct aid and financing measures for the WFP's immediate needs, but in the longer term, it wants action "to ensure that this man-made disaster never happens again," Zoellick said.
The food reserve plan follows a proposal developed by the International Food Policy Research Institute (IFPRI) in Washington, calling for both a modest stockpile of grain to use in emergencies and a "virtual" system that could smooth out the spikes in commodity trade.
The two-pronged approach would assist the WFP by seeking commitments from major
nations for a series of physical grain reserves totaling 300,000 tons, or about
5 percent of annual food aid flows, IFPRI said. These would be stationed in or
near developing countries for rapid use in emergencies and would be replenished
to avoid the spoilage problems of larger reserves.
The "virtual" system would call on countries to pledge funds on a "promissory" basis to intervene in grain futures markets as needed to discourage speculation when prices are driven to extremes. A fund of U.S. $12-20 billion could cover 30- 50 percent of normal world grain trade, sending a strong signal to the market, although the money might never be spent.
In an interview with Radio Free Asia, IFPRI division director Maximo Torero said the "virtual" fund would work by trading in the futures markets, much as speculators do. But instead of driving prices higher, the fund would invest in "short sales," offering to deliver grain in the future at a lower price. The low bids would raise the risk for speculators if they bet prices will keep going up.
An IFPRI study found a jump in futures activity by non- commercial traders over
the past six months, suggesting that speculation has pushed prices beyond the
normal effects of supply and demand.
"We have some indicators showing
that there is a statistically significant causal relationship between ... speculation and the prices," Torero said. "The market is not working properly. There is a lot of pressure on
The "virtual" reserve system would increase its steadying effect
over the futures market by operating "silently," so that speculators could not tell when the fund might move to sell at a lower price.
Although the food plan has been compared to strategic petroleum reserves that are coordinated by the Paris-based International Energy Agency (IEA), the oil stockpiles are supposed to be used only in case of supply disruptions rather than to influence prices.
Torero said the food crisis is fundamentally different.
"The problem with food is that you're affecting real lives," he said.
Torero stressed that intervention in the markets would take place only in
extreme instances after an international technical commission finds that prices
have moved beyond a band that would be justified by supply and demand. The
system is designed to counter market distortions created by forces such as
excessive speculation and export restrictions, he said.
In their joint statement on global food security, the G8 leaders pledged to "explore options on a coordinated approach on stock management, including the pros and cons of building a 'virtual' internationally coordinated reserve system for humanitarian purposes."
World Bank spokeswoman
Elisabeth Mealey told RFA that the food reserve plan has Zoellick's personal
support, as well as that of the bank. "He's
definitely taking it up," she said.
The G8 consists of Canada, France, Germany, Great Britain, Italy, Japan, Russia
and the United States.