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JAISAL NOOR: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.
Today we're going to look at the impact of derivative and insurance markets on farmers
and people facing food insecurity in the developing world.
Now joining us is Sasha Breger Bush. She's a lecturer at the Josef Korbel School of International
Studies at the University of Denver. She teaches courses on the global economy, development,
and food and farming. Her latest book is titled Derivatives and Developments.
Thank you for joining us.
SASHA BREGER BUSH: Thank you for having me.
NOOR: So can you explain this link between derivatives and insurance markets on people
facing food insecurity in the developing world, as well as farmers? And could you even start
off by just explaining what a derivative is for those of us that might not be aware?
BREGER BUSH: Absolutely. Sure thing. So a derivative is a financial contract. And the
derivatives are derived from an underlying market, hence their name derivative. Now,
derivatives can be based on all sorts of different commodities, assets, indexes and rates, everything
from gold and coffee and corn on the one hand to oil and interest rates and the Dow Jones
industrial average on the other. We trade a lot of different derivatives on a lot of
different kinds of markets all over the world.
Now, despite their diversity, derivatives usually serve two functions. The first is
hedging, and the second is speculation.
A hedger might enter the derivatives market in order to reduce the risk that they face
elsewhere in the economy. And historically farmers have used agricultural derivative
markets to create a kind of--to buy a sort of insurance on these markets to protect them
from price fluctuations. So, for example, if a farmer is worried that the price of his
crop will fall over the next six months, the farmer can sell his crop short, meaning that
he sells it in advance for a predetermined price. And this allows farmers and other actors
in the food system to get a little more security, a little more certainty in regard to their
operations.
Now, historically, as well as currently, we also see speculators playing a big role in
the marketplace. Speculators, rather than reducing risks, are looking to take on risk
in the marketplace in the interest of turning a profit.
So that's basically how the two different kinds of players in the markets and the functions
the markets serve.
Now, what we're starting to see over the past 10, 20 years or so is that the number of speculators
and these markets have been increasing enormously. There's a huge amount of speculative activity,
and particularly since the financial crisis in 2007 and 2008. We've seen many financiers
and financial institutions rushing headlong into these markets in the interest of making
profits and balancing out losses in their portfolios from other sorts of investments.
And this has created all sorts of problems for farmers as well as for consumers in the
food system, because the more speculation there is in these markets, the more volatile
prices become, and volatility, when prices rise too high, is very detrimental to consumers,
particularly poor urban consumers and poor rural consumers. I mean, on the other hand,
when prices fall very quickly, the other side of volatility, rural livelihoods and farmers,
particularly small farmers, are thrown into tumult as well. So either side of the volatility
coin is detrimental to somebody in the food system. And this is why historically we've
tried to maintain more stable food prices. And derivatives markets are kind of throwing
a monkey wrench into price stability these days.
NOOR: So explain how this is facilitating a transfer of wealth from farmers in agriculture
to the financial sector.
BREGER BUSH: Absolutely. So the derivatives markets, what we see, I mean, agricultural
derivatives markets, this is providing a context within which financial institutions and financial
actors can make enormous profits by betting on the prices of commodities. And we've see
financial firms the world over raking it in since 2006 and 2007 as a consequence of their
derivatives trading. So this is the one side of the system, the financial context within
which people are making lots of money off of derivatives.
On the other hand, the more speculative trading there is in the markets, the more volatile
food prices become. And the costs of volatile food prices are borne disproportionately by
the world's poorest actors, for example poor urban consumers or poor farmers. Risk and
volatility generally hit the poor hardest. And given that the poor spend much more of
their income on food than we do in wealthier countries, the impact of rising and volatile
food prices is greater for them as well.
So we have some actors profiting off this volatility, and we have other actors really
losing as a consequence of this volatility. And it seems to me that it represents, when
you look at who those parties are, this represents a transfer of wealth from the poorest actors
in our food system to some of the wealthiest actors in the financial system.
NOOR: So on June 12, the Commodity Futures Trading Commission implemented part of Dodd-Frank,
the financial reform which requires mandatory clearing of derivative markets. However, Wall
Street lobbyists are already at work trying to water down some of these reforms. Talk
about the impact and if they're going to be successful.
BREGER BUSH: Sure. In regard to bringing OTC derivatives into organized clearinghouses,
I think this is a wonderful idea. I think it's pretty inadequate, though, while it's
a step in the right direction. The idea with bringing OTC derivatives into the clearinghouses
is the idea that this could mitigate counterparty risk. So by facilitating trades vis-a-vis
a clearinghouse, you have an entity that can pay the winners in the market even if the
losers default. I mean, this was a problem that we saw in the context of credit default
swaps and AIG defaulting on its commitments to other actors in the financial system. And
so, in terms of adding stability to the financial system, I think bringing OTC derivatives into
the clearinghouse system is a wonderful idea.
However, in the context of commodity speculation, I think that regulation has been slower and
certainly not severe enough. I would like to see much stricter position limits on speculative
positions. Up until this point there has been an exemption on position limits for commodity
index swap dealers, and I think that that loophole certainly needs to be closed, along
with a number of other measures to limit the extent of speculation in the marketplace.
Again, those in the market who are least able to bear volatility and risk are having it
foisted upon them by actors that are very wealthy, very powerful, and very sophisticated.
It strikes me as a really clear-cut case of injustice.
NOOR: And if the regulation is lacking and you have the impacted populations that are
already the most marginalized and with the least political clout as far as influencing
policy, what is it going to take to remedy the causes of this redistribution of this
increasing food scarcity?
BREGER BUSH: You know, what's very interesting is that I think we in the United States, as
well as regulators in Europe, could really take some interesting lessons from new exchanges
and regulators in the developing world. In the Chinese and Indian cases, we see much
more severe regulation of speculative instruments and speculative traders in the marketplace.
And so I think that moving forward we have actually a number of examples out there about
what better regulation could look like.
In addition, I think that looking at the derivatives side of things is really only part of the
problem. We have a global food and agricultural system that is marked by price swings and
volatility and risk. And so at the same time as we're curbing the sources of this risk
and volatility, in this case derivatives and speculators in those markets, on the other
hand we also need to be working to create a food system that is kinder, right, to the
most marginalized in it. So how do we create a food system that is less prone to volatility,
less prone to risk, and that affords risks management opportunities to everybody, whether
they're big or small, rich or poor, sophisticated or inexperienced? That seems to me to be a
place where we can make an awful lot of headway.
NOOR: Sasha Breger Bush, thank you for joining us.
BREGER BUSH: Thank you very much for having me.
NOOR: And thank you for joining us on The Real News Network.