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Speculation in Commodities

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The other possible cause of food crisis during the period f 2008 is the financial speculation and the impact of financialization of agricultural market. The argument that was proposed was that the market deregulation and development was to make a whopping flow of financial capital into the food commodity sector from early 2005 onwards. This created a financial speculation bubble, which pushed the food commodities prices upwards to a point above what could be explained economically through the forces of food demand and supply alone (Kjolberg 2010).

From the period between 2006 and 2008, the prices of food and the speculation levels were correlating, and only adjusted shortly prior to the prices of food peaked approximately 90 percent of the investors expressed their interest in investing on the commodity index funds. Some critiques claimed that the hypothesis was merely based on assumptions, and had minimal empirical evidence and theoretical support. The part of the future markets is comparatively new to the food sector. This has caused many scholars and commentators to misinterpret the fundamentals of financial trades and speculation impacts on the commodity prices. The concerns about negative impacts of speculation is a known phenomenon associated with the agricultural sector. Commercial marketing with the future and options of the food commodity have been applied traditionally to protect against the future prices tread, as an insurance measure for the production of food and people who depend of trade of food commodities. Considered as one of the largest corn exporter, and having a significant grains exchange, the US regulations are significant. Speculation in the name of hedging was started back in 1800s with the establishment of the Chicago Board of Trade in 1856. Thereafter, financial speculation entered the food commodity markets. The non-commercial traders and financial speculators are to blame for the food prices volatility. The exchange Act restricted the number of contracts speculators could have and trade. This regulation stayed in place until the finance sector in early 1990s embraced deregulations, despite the US Treasury Dept warned against the increasing price volatility (Cohen 2009).

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