Thursday, January 12, 2012

Banking: How European Banks Fuel Hunger

By Jaya Ramachandran
Courtesy IDN-InDepth NewsReport

BRUSSELS (IDN) – A new report by Friends of the Earth Europe has faulted European banks, pension funds and insurance companies for increasing global hunger and poverty by speculating on food prices and financing land grabs in poorer countries.

High food prices negatively impact people in Europe too. Producers and consumers have struggled with high food prices pushing up the cost of living across Europe, says the 44-page report released January 12, 2012. Titled 'Farming Money', the report analyses the activities of 29 European banks, pension funds and insurance companies, including Deutsche Bank, Barclays, RBS, Allianz, BNP Paribas, AXA, HSBC, Generali, Allianz, Unicredit and Credit Agricole. It discloses the significant involvement of these financial institutions in food speculation, and the direct or indirect financing of land grabbing.

Land-grabs, following direct and indirect investments in land by large European financial institutions, mean European companies are snatching up land, increasingly in Africa, at the expense of local livelihoods and food sovereignty, in addition to causing knock on environmental devastation through land-use change, explains the report.

As the report further points out, food speculation, with billions of Euros flooding in and out of financial products based on foodstuffs, causes price volatility. Such rapid and unpredictable price swings hit the most vulnerable hardest, threatening their right to food, and making it more difficult for farmers to maintain an income – creating instability, hunger and poverty.

Food prices, which are monitored by several bodies including the UN Food and Agriculture Organisation (FAO) and the World Bank, rose steeply in 2007 after a period of relative stability, increasing by an average 56% between January 2007 and June 2008.

This price spike, which led to riots and protests in 25 countries, followed a general rise in commodity prices, particularly in oil. It also coincided with the subprime mortgage crisis, which caused investors to start withdrawing funds from bond markets. Food prices fell again at the end of 2008, only to hit a new all-time high in February 2011.

The UN's FAO has estimated that100 million more people were pushed into hunger and extreme poverty as a result of the 2007-2008 price increases, triggering riots and protests across the Middle East, South America and Asia.

High food prices hit the poorest the hardest, as they spend a greater proportion of their income on food, says the report. A World Bank study on the impacts of the price increases in June-December 2010 concluded that "the results show that those who are already poor were disproportionately affected by the increase in prices as the share of food in their consumption basket is higher than the non-poor."

For people who sell more food than they buy, high prices mean extra income. The World Bank estimated that 24 million people escaped poverty as a result of June-December 2010 high prices, but 68 million people entered into poverty in the same period.

Price volatility is also damaging. Rapid price swings caused by rapid movement of money in and out of commodity markets mean that farmers cannot predict the price their crops will command. This makes it more costly for farmers to hedge against future price changes. The FAO and OECD have noted that "many governments are concerned about price volatility even in the very short term, because it threatens both farm viability (low prices) and foodsecurity (high prices) [and] affects investment decisions."

In view of this, environmental and development are calling for strict regulation to rein in these destructive activities is the necessary.

Daniel Pentzlin, sustainable finance campaigner for Friends of the Earth Europe said: "Food speculation and the financing of land grabbing leads to a catastrophic instability in global food prices – forcing millions of people into poverty and hunger. European banks, insurers and funds that speculate with food and land are gambling with peoples' lives whilst reaping huge profits. This industry needs strict regulation to protect the poorest in society."

The European Commission's proposed new rules for improving transparency in commodity derivatives markets are a first step in the right direction, but serious omissions and loopholes need to be addressed.

Pentzlin was referring to a set of proposals for a revised Market in Financial Instruments Directive (MiFID II) and a new Regulation (MiFIR) that the European Commission published on October 20, 2011:

'Farming Money' recommends a set of key measures to regulate European financial markets and tighten corporate policies on financial services and investments in food commodity derivatives and land deals.

The report says: "In order to avoid excessive speculation influencing food prices, the de-regulation that has taken place over the last 20 years must be reversed. Commodity futures markets have become monstrous in size compared to the actual production of the traded commodities, thereby causing volatility and longer-lasting speculative bubbles."

One way to address serious omissions and loopholes in European Commission's proposal of October 2011 is to put caps on the size of the bets speculators can make, so called "hard position limits". These are essential to tackle excessive speculation.

The report pleads for strengthening EU proposals and improving supervisory capacities, adding: "Index speculators and similar types of investors should be banned from agricultural commodity markets. Indexes that track agricultural commodities or commodity derivatives should be excluded from use by index funds, ETFs (Exchange Traded Funds) and related structured and synthetic products."

Friends of the Earth Europe calls upon private financial institutions, including banks, pension funds and investors, to investigate their involvement in food speculation and their direct or indirect investments in land grabs, and publish the results of that research, making it available to relevant stakeholders.

They are asked to liquidate their open positions in food commodity derivatives and related funds and refrain from further activities that are not directly linked to hedging for farmers, food processing companies and related commercial traders.

Commodity index funds and related structured and synthetic products should be phased out. Investments in agricultural commodities and related derivatives should not be retailed to end-customers. Fund managers and financial service providers should apply strict codes of conduct on the use and sale of food commodity products and agricultural land investment as well as respective financial services, says the report.

"2012 offers a big opportunity for Europe to put a stop to the environmental and social damage done by financial markets. Politicians need to step in and end excessive and harmful speculation," Pentzlin said.