With food inflation causing riots throughout the world, is it unethical to speculate on food prices?
Rising food prices, sometimes called 'agflation', and the riots they sparked in developing countries, have been blamed at least in part on commodity speculators. This has led some to question whether it's ethically acceptable to invest in food commodities such as corn (LSE: CORN) and wheat (LSE: WEAT).
The answer to any question of investment ethics is bound to be subjective, as people have different limits on what they'll do for money. For some people, whatever is legal is fair game, and obviously some cast the net even wider than the constraints of legality.
For me, it's a question of how I choose to use my resources; money is power, and if I allocate it in a way that contributes to someone's starvation, for example, then in my opinion that is not an acceptable investment.
But to what extent does allocating investment to food commodities cause hardship? If food was being hoarded for investment reasons while people were starving, that would be a problem, but this is not happening. According to the United Nations, food stocks have declined by an average of 3.4% per annum over the past decade -- an expected fall of another 5% this year will bring cereal stocks to a 25-year low.
And there's little reason for speculation to cause hoarding. Commodity trading is based around futures -- contracts to buy or sell a specific quantity at a set date for an agreed price. When speculators buy futures, they very rarely take delivery of the commodities involved; ultimately, the product still moves from the producer (e.g. farmers) to the industrial consumer (e.g. food companies) exactly as you'd expect.
Similarly, when we buy Exchange Traded Commodities (ETCs), we are participating indirectly in that futures market. With the exception of a few precious metal funds, ETCs don't take physical possession of the underlying commodity.
But while these investments are not reducing the amount of food available, are they pushing the price beyond the means of some people? In a shortage, by definition, some people will be left without sufficient food. It could be argued that high prices simply allocate that distress to the most impoverished in society. Prices are not the problem; scarcity is the problem, high prices are a result of that scarcity, and in the nature of things it's the poor who suffer most.
The extent to which speculation contributes to increased prices is hotly debated at the moment, and it's a topic I hope to address in the near future. But just as importantly, from an ethical perspective, is the fact that high prices are not necessarily undesirable.
There are many reasons for poverty in Africa, but falling crop prices were a contributory factor in the 1980s and '90s. Movements such as Fairtrade evolved, in part, to guarantee a sustainable minimum price to farmers faced with depressed commodity markets. While increased prices don't fully trickle through to farmers, their lot is definitely improved when the world wants to pay more for their produce.
We can also expect more efficient use of land, now that it's worthwhile to farm it again. The EU has suspended the 'set aside' scheme, under which farmers were paid reduce output, while in Brazil and elsewhere, previously unused land is being brought into production for the first time.
Yield improvement is now a priority. According to Ban Ki Moon, the UN Secretary-General, the world will have to increase food production by 50% by 2030. Higher prices will be the catalyst for that increase, leading to less waste, greater investment in efficiency, and more food for the world to eat.
My conclusions:
- investing in food commodities does not reduce supply;
- speculation may contribute to making food more expensive;
- expensive food will help to correct the problem of insufficient production.
So far, I don't see anything that would ethically prevent me from investing in food commodities, but it is a complex area and there may be factors that I've missed. Comments from readers would be appreciated.
More: Commodities -- Spoiled For Choice | Profit From Food Price Rises
