Why do we let food speculators give us the Chocfinger?

 By Sifu Renka

In the UK, we are continually presented with the idea that foreign nations stand in the way of global financial stability. For example, we allegedly can’t properly regulative hedge funds, lest they flee overseas.  But before we rush to condemn others, perhaps it is time to consider what role the UK plays in dragging down global standards?

The UK is a global centre for commodities derivatives trading. These markets allow agricultural and energy producers and consumers to pass-on price risk to those who are willing to bear it. This should theoretically result in lower food and energy prices for the general public. Manipulative behaviour, however, can disrupt this important function, and the role these markets play in price-discovery (futures are also used as a benchmark for pricing in the physical market). Despite an urgent global need for efficient commodity derivatives markets, non-competitive behaviour occurs in London, as a result of comparatively lax regulation. 

For example, during this past summer there was a shortage of cocoa in the physical market. Clearly noting these underlying conditions, an individual market participant started buying July-contract cocoa futures, and built up an enormous holding which effectively dominated the market for this contract (cocoa futures promise delivery of a given amount of cocoa, on a given day, at a given price). But due to shortages in the physical market, not all of the July futures contracts in existence could be settled with the physical delivery of cocoa. Consequently, many of the market participants who had sold these contracts had to settle their obligations in cash.  But as one participant had bought most of the contracts, they were able to “squeeze” the settlement price to extract excessive profits.

This is a form of market manipulation that could not occur in US commodities markets, where position limits for speculators are in place. It also illustrates the lack of transparency in London commodities markets. How could such behaviour go unnoticed until it was too late? In the US, Commitment of Trader reports are published on a weekly basis. These disclose the number of contracts that have been bought and sold by the various types of participants, as well as the net positions held by each of the largest market players. Why is such information not available in the UK? The UK also discloses less information on European commodity inventories than is disclosed by the US on American inventories. Moreover, the UK allows self-regulation. This is clearly imprudent, as exchanges profit from increased trading volumes, and, thus, have an incentive to limit regulatory barriers. The US recognises this danger, and has an independent regulator: the Commodities Futures Trading Commission (CFTC). The UK desperately needs such a supervisor.

The United States is traditionally thought to be the epicentre of neoliberalism. But the US is actively intervening to help facilitate smooth-running commodities markets, whilst the UK is shirking this important duty. Why do we allow substandard commodities regulation in London? The financial sector is undeniably a significant contributor towards UK GDP and tax revenues, but does this mean we must cave to its every demand? Should the UK really be profiting from inefficient agricultural markets? Before we condemn overseas havens, we should fully acknowledge the extent to which the UK exploits global demand for lax governance. It is time the UK shakes off this shame, and stops dragging down global regulatory standards.