People's Democracy

Editorial

 

PRICE RISE

 

Ban Speculative Trading

 

DESPITE an unprecedented discussion in both the houses of the parliament on a motion moved by the Chair  “urging the government to protect the aam admi  from the negative effects of inflation”, the rise in the prices of essential commodities continues to eat into the living standards of the people. 

 

The government has adopted a new series of inflation index with 2004-05 as the base year.  Often, changes are made in the series of index numbers in order to throw up statistics that conceal more and paint a rosier picture  of the economy.  Despite this, food inflation reached 15.10 per cent for the week ending September 4, 2010.  This is the third consecutive week when food inflation has shown an upward trend.  Cereal prices rose by 7.16 per cent while pulses became dearer by 6.10 per cent.  Wheat prices rose by 10.16 per cent and that of rice by 5.74 per cent.  Milk prices soared by 23.41 per cent while prices of vegetables and fruits also rose.

 

Amongst the various suggestions made by the massive public protest actions that led to this parliamentary discussion was the demand to ban all futures/forward trading in essential commodities to prevent speculation-led food inflation. The finance minister, in his reply, had assured that this issue would be examined and, if necessary, such a measure would be undertaken, at least temporarily.  However, nothing substantial has happened on this score. 

 

This is not surprising since such a measure would directly dampen massive profit generation for speculative trading corporates.  The arguments that the CPI(M) had advanced both in the parliament and in these columns in the past have always been evaded under the plea that such trading does not lead to inflation.  In a sense, a resounding vindication of our  position has now come in the report of the UN special rapporteur on the right to food. Appointed directly by the United Nations Human Rights Council, the rapporteur reports directly to the UN general assembly. In his briefing note on the impact of speculation on the volatility of the prices of basic food commodities and the global food crisis that occurred between 2007 and 2008, he says, “A significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble.” 

 

“In particular, there is a reason to believe that a significant role was played by the entry into markets for derivatives based on food commodities of large, powerful institutional investors such as hedge funds, pension funds and investment banks, all of which are generally unconcerned with agricultural market fundamentals. Such entry was made possible because of deregulation in important commodity derivatives markets beginning in 2000. These factors have yet to be comprehensively addressed, and to that extent, are still capable of fuelling price rises beyond those levels which would be justified by movements in supply and demand fundamentals. Therefore, fundamental reform of the broader global financial sector is urgently required in order to avert another food price crisis.”

 

It is precisely such a tendency that is happening in India which has contributed to this unprecedented rise in prices.  On a year to year basis, the total value of trade in agricultural commodities in the commodity exchanges during the fortnight ending January 31, increased by a huge 64.14 per cent. The cumulative value of trade in agricultural commodities during the year from April 1, 2009 to January 31, 2010 grew by a whopping 102.59 per cent, in absolute terms valuing over Rs 10,13,379.97 crores. Now, any forward trading can make profits only when the prices of these commodities are higher than what they were when the trading initially took place. Such huge volumes and value of trade can only happen if the prices continuously rise generating super profits. The people are paying higher prices to feed such profits.

 

The UN report describes a similar process that took place globally in 2007-08 and states, “It was possibly the first price crisis that occurred in an economic environment characterised by massive amounts of novel forms of speculation in commodity derivative markets.”  It points out that the value of outstanding `over the counter’ derivatives grew from $ 440 billion in 1998 to $ 770 billion in 2002, jumping to $ 7500 billion in June 2007. 

 

“The particular area of concern is speculation in derivatives based on food commodities.  A study conducted by Lehman Brothers just before its bankruptcy revealed that the volume of index fund speculation increased by 1,900 per cent between 2003 and March 2008. Morgan Stanley estimated that the number of outstanding contracts in maize futures increased from 500,000 in 2003 to almost 2.5 million in 2008. Holdings in commodity index funds ballooned from US $ 13 billion in 2003 to US $ 317 billion by 2008. In the light of such developments, the UNCTAD Trade and Development Report 2009 found that `the trend towards greater financialisation of commodity trading is likely to have increased the number and relative size of price changes that are unrelated to market fundamentals’.” 

 

Describing such speculation, report says: “If the buyer is willing to offer a higher price for a future than before, it means that she expects the eventual price of the commodity to increase further. As such, if the price of commodity futures goes up, it signals to sellers on stock markets to raise their prices. Indeed, the grain futures prices quoted by the Chicago Mercantile Exchange tend to be incorporated directly into grain trade contracts the world over.” Further, it points out that a speculator, unlike other investors in agriculture does not create any new capital. If a speculator goes bankrupt, the creditors will have nothing to fall back upon to reclaim their debts. 

 

Having established that this run away inflation had little to do with market fundamentals, the report also debunks the IMF’s theses, infamously articulated by George Bush, that the food price increases were the result of per capita income growth in China and India, by establishing that, “China and India exhibited falling aggregate and per capita foodgrain consumption.”      

 

Amongst the various recommendations calling for a “comprehensive reform of all derivatives trading”, the report calls for a legal distinction to be made between commodity derivatives and financial derivatives and genuine commercial traders and sheer speculators.  The report calls on all UN member states to seriously consider these recommendations, “to enable states to fulfill their legal obligations arising under the human right to food”.

 

Given the widespread influence of `crony capitalism’ in India, which continues to further grow as reflected in the recent telecom 2G, illegal mining, IPL, Commonwealth Games scams, to expect market regulations to deliver relief to the people would be like asking for the moon.  If the interests of the aam admi have to be protected and the unanimous sentiment of the parliament respected, then this UPA-II government must immediately ban all speculative trading in the commodity exchanges. 

(September 29, 2010)