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‘Financialisation’ of commodity markets seen as root cause of price volatility

http://agritrade.cta.int, 09 December 2012

Tuesday 26 February 2013, by Carlos San Juan

‘Financialisation’ of commodity markets seen as root cause of price volatility 09

A policy brief has been published by UNCTAD, arguing that in a context where ‘the volume of exchange-traded derivatives on commodity markets [is now] 20 to 30 times larger than physical production’, the root cause of commodity price volatility is the financialisation of commodity markets. It argues that ‘the influence of financial markets has systematically transformed these real markets into financial markets,’ and maintains that this financialisation of commodity markets means that ‘the price discovery market mechanism is seriously distorted. Prices can move far from levels justified by the fundamentals for extended periods.’ This, according to the brief, ‘impairs the allocation of resources and has negative effects on the real economy’.

The analysis, which contributes to a hotly contested area of public policy, argues that ‘strong and prompt policy and regulatory responses in the financial markets, rather than in the physical markets’ are needed to address the root cause of commodity price volatility (see Agritrade article ‘Draft report leaked on possible response to food price volatility’, 2 May 2011). The policy prescriptions for mitigating adverse effects of volatility are as diverse as the analyses of its causes. One industry site, for example, questions the effectiveness of the G20 initiatives to establish the Agricultural Market Information System (AMIS) and the Rapid Response Forum, both of which are aimed at promoting better coordination of policy responses to price volatility. Thedairysite.com argues that ‘while the sources of the problems have been recognised, there appears to be a lack of concerted willingness in every country to take action to keep global food prices stable.’ This in part appears to be alluding to the issue of the financialisation of agricultural commodity markets dealt with in the UNCTAD paper.

Sources UNCTAD, ‘Don’t blame the physical markets: Financialization is the root cause of oil and commodity price volatility’, Policy Brief No. 25, September 2012 http://unctad.org/en/PublicationsLibrary/presspb2012d1_en.pdf Thedairysite.com, ‘Can the world beat global food price spikes?’ 19 September 2012 http://www.thedairysite.com/news/39914/can-the-world-beat-global-food-pr...

‘Financialisation’ of commodity markets seen as root cause of price volatility 09

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