As poor countries struggleagainst soaring food prices, the World Bank is pushing a plan to keepspeculators from taking advantage and getting rich.
The plan, which was recommended to the leaders of industrialized nations at theG8 summit in Toyako, Japan, would establish an international strategic food reserve to meet emergencies.
In a letter to Japanese PrimeMinister Yasuo Fukuda, the summit host, the World Bank's president RobertZoellick urged study of the plan for a "virtual" reserve to fightmarket speculation that can drive food prices to dangerous levels in futurestrading.
"Absent such a step, the breakdown in international food markets is likelyto prompt an ad-hoc building of stocks, perhaps further boosting prices, and the international community may not beable to access food for those in critical need," Zoellick said.
Officials believe that speculation played a part in just such an episode inMarch when rice prices doubled to over $600 per ton, threatening World Food Program (WFP) deliveries to 450,000children at Cambodian schools. Rice prices kept climbing to over U.S. $1,000 per tonas at least 26 countries imposed export restrictions to preserve domesticsupplies.
Prices have since subsided to U.S. $725 per ton for Thai B- grade white rice, butthat is still far more than many of the world's poor can afford. The World Bank estimates that the combination of highfuel and food prices may force over 100 million people into "extremepoverty."
The bank is backing a series of direct aid and financing measures for the WFP'simmediate needs, but in the longer term, it wants action "to ensure that this man-made disaster never happens again," Zoellick said.
Modest stockpile
The food reserve plan follows a proposal developed by the International FoodPolicy Research Institute (IFPRI) in Washington, calling for both a modest stockpile of grain to use in emergenciesand a "virtual" system that could smooth out the spikes in commodity trade.
The two-pronged approach would assist the WFP by seeking commitments from majornations for a series of physical grain reserves totaling 300,000 tons, or about5 percent of annual food aid flows, IFPRI said. These would be stationed in ornear developing countries for rapid use in emergencies and would be replenishedto 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 graintrade, sending a strong signal to the market, although the money might never bespent.
In an interview with Radio Free Asia, IFPRI division director Maximo Torerosaid the "virtual" fund would work by trading in the futures markets,much as speculators do. But instead of driving prices higher, the fund wouldinvest in "short sales," offering to deliver grain in the future at alower 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 overthe past six months, suggesting that speculation has pushed prices beyond thenormal effects of supply and demand.
"We have some indicators showingthat 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 onit."
The "virtual" reserve system would increase its steadying effectover 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 thatare coordinated by the Paris-based International Energy Agency (IEA), the oil stockpiles are supposed to be usedonly in case of supply disruptions rather than to influence prices.
'Real lives'
Torero said the food crisis is fundamentally different.
"The problem with food is thatyou're affecting real lives," he said.
Torero stressed that intervention in the markets would take place only inextreme instances after an international technical commission finds that priceshave moved beyond a band that would be justified by supply and demand. Thesystem is designed to counter market distortions created by forces such asexcessive speculation and export restrictions, he said.
In their joint statement on global food security, the G8 leaders pledged to "explore options on a coordinatedapproach on stock management, including the pros and cons of building a'virtual' internationally coordinated reserve system for humanitarianpurposes."
World Bank spokeswomanElisabeth Mealey told RFA that the food reserve plan has Zoellick's personalsupport, as well as that of the bank. "He'sdefinitely taking it up," she said.
The G8 consists of Canada, France, Germany, Great Britain, Italy, Japan, Russiaand the United States.