If you want to invest your money, Denmark's banks let your money grow by investing them in food. Many have done this, so right now around DKK 1.3 billion (approx. 175 million euro) has been invested in food commodities at Nordea, Danske Bank and Jyske Bank.
What the banks do not tell you is that this type of investment helps drive food prices upwards. According to the World Bank and the UN, food speculation contributes to higher prices on basic food commodities such as wheat and maize.
During the 2008 food crisis, food commodity prices reached historically high levels. So did the extent of speculation in food commodity prices. After the crisis, food prices fell drastically, but in 2011 prices have once again reached 2008 levels.
Within the last year, the world market price on wheat has risen by 55 per cent and maize by 84 per cent. Due to the current price increases, 44 million people have so far been forced into extreme poverty and hunger.
Investments in food commodities have boomed
In the last decade, global investments in food commodities have multiplied. It is a specific type of investment that has boomed. It is not the food commodities themselves that are bought or sold. Rather, investors buy and sell financial contracts specifying an expected future price on e.g. wheat, maize or soy. This type of financial contract is known as a futures contract.
The total global value of outstanding futures and similar financial instruments increased from DKK 2 billion (approx. 265 million euro) in 1998 to more than DKK 15 billion (approx. 2 billion euro) in 2010.
Danish banks are actively contributing to food speculation by giving their customers the opportunity to invest in futures and structured bonds backed by agricultural commodity futures.
Nordea, Danske Bank and Jyske Bank provide the opportunity to invest in structured bonds. Nordea and Jyske Bank also offer their customers to invest food commodity futures.
The three biggest Danish banks have roughly DKK 1.3 billion (approx. 175 million euro) invested in structured bonds backed by agricultural futures. According to figures from the National Bank of Denmark, private households are responsible for 70 per cent of these investments.
Speculation contributes to hunger and poverty
It is no longer just the traditional mechanisms of supply and demand that determine food commodity prices on the world market. According to the World Bank and the UN, speculation in food commodity prices via futures and structured bonds also plays a role. Sometimes quite a huge role. Speculation can amplify the fluctuations in food prices created by supply and demand factors, which ultimately can lead to a price bubble.
The 2008 global food crisis, where up to 100 million people were pushed into hunger and extreme poverty, was an example of a food price bubble. Food commodity prices on the world market increased drastically while investments in food commodities increased proportionally. ”The almost parallel increase is a clear indicator that speculation helped push prices upwards and that it therefore was on of the reasons for the food crisis. Prises can increase simply because everyone expects increasing prices”, says Henning Otte Hansen from the Institute of Food and Resource Economics at LIFE, the Faculty of Life Sciences at the University of Copenhagen.
According to the UN Special Rapporteur on the right to food, Olivier De Schutter, increasing food prices made more people invest in food futures, which in turn caused prices to increase, and so forth. ”My concern is that these financial markets have gained their own life over the last 10 years and consequently, because of the amount of trades, they are drastically reducing the significance of the physical markets on which the commodities are sold”, says Olivier de Schutter. There are a number of reasons that all help determine the market price on food commodities, including harvest yields, freight costs, population growth, the supply of competing food commodities, etc. Nevertheless, Olivier De Schutter, UN Special Rapporteur on the right to food, fears that speculators are setting the agenda on the market.
”The logic has become purely speculative. Investors (…) do not make decision based on underlying supply and demand. The result will be greater fluctuations in prices: Price bubbles will emerge and burst. This will hurt, especially small producers and low-income countries that import food commodities”, says Olivier de Schuttter.
