We announced last week that we’d won a victory against the practice of “food speculation” by getting the EU to legislate against it. The world of financial trading is confusing, so here’s a quick explanation of what we meant.
What’s food speculation anyway?
It means betting on the future price of food crops. This betting on prices can actually affect the price, causing more volatile global food markets and driving up prices. For some people, that means a more expensive grocery shop but for others it means not getting enough to eat.
What’s this new legislation?
The full name is the Markets in Financial Instruments (MiFID) guidelines. The rules were developed by the European Union to help establish “a safer, more open and more responsible financial system“.
What will it achieve?
It will limit the amount of “commodity derivatives” (financial instruments based on things such as crops) that can be held by investors. It will also force investors to be more transparent about their dealings, increasing public scrutiny and making it easier for campaigners like us to hold them to account if they behave badly. So: less dealing in food, more transparency about the dealing that does go on.
Sorry, what’s a commodity derivative again?
A commodity derivative is a financial contract based on the price of a resource (such as gold or coffee). The price of the resource, e.g. the price of wheat, affects the price of the commodity derivative. For many years the people who grow crops have made such contracts, but the problem arises when the link is broken between the crop, the grower and the buyer. Most people who trade in e.g. wheat derivatives will never see a sack of wheat or talk to a wheat farmer. Trading in commodity derivatives without any link to the people who buy or sell the actual commodities: it’s a recipe for market volatility and price spikes.
So what does all this mean?
This legislation will:
- put a limit on how many commodity contracts you can invest in
- make trading more transparent, so it’s more obvious how financial institutions are investing.
This will hopefully:
- reduce abuse of the commodity market
- reduce price volatility and the likelihood of spikes in the global price of basic goods such as wheat
- make it harder for big players to dominate the commodities market
The market in commodity contracts will continue, but it will be better-regulated and more transparent than before.
Any questions? Please leave us a comment if so!
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