Regulation on financial speculation in agricultural commodities

First published in French in Bilan ahead of the vote.

Banning financial speculation on agricultural commodities in Switzerland – the only way to address food prices?

Priti Patnaik, 26 February

To weed out good speculation from bad speculation, is a good principle, but difficult to implement. The initiative to ban financial speculation of foodstuffs in Switzerland may or may not get enough support on Sunday, but it has certainly drawn attention to the role on financial speculators in contributing to volatility that ultimately impacts food prices. Instead of an outright ban of financial speculation, greater regulations, including imposing position limits, can be a more appropriate solution, experts say.

It is a complex subject with many nuances and no straight assumptions. It is vitally important because the commodity business contributes nearly 4% to the Swiss GDP, with nearly 550 companies in the country.

The group which has called for the vote believes that, financial speculation on commodities contributes to artificially-created demand, resulting in increased food prices. This, they say, increases the burden on the poor in developing countries who spend substantial part of their incomes on food.


The industry and the government are of the view that there has not been enough definitive evidence linking financial speculation to increases in food prices.

The reason why there is not enough evidence yet, is also because it is very difficult to measure this. However, there is unequivocal evidence that volatility in prices is caused by financial speculation. And it is this volatility that has some impact on food prices. Financial speculation exacerbates booms and busts in the cycle.

Ronald Jaubert, professor of development studies at the Institut de hautes études internationales et du développement (IHEID), Geneva, said “Volatility is a major problem for farmers and agro industries. There is a clear need to reduce volatility and thus to control speculation even if the effect on prices cannot be measured.”

Volatility impacts prices in the short term. But mostly, prices in the long term are still determined by actual  supply and demand. Just as there are studies that show that future prices have no impact on spot prices, there are also studies that prove that commodity futures market can have an impact on spot prices. As you can tell, that both sides have arguments, but surely there is enough evidence to think about ways to address excessive financial speculation.

The link between speculation and prices has also been hard to pin down for other reasons. Experts such as Sophia Murphy, senior advisor at the Institute for Agriculture and Trade Policy, who has done extensive work on the subject, points to the shifts evident in the 2007-2008 crisis, including the role of energy speculation and the link created by biofuels between food and energy markets.

To illustrate how integrated commodities can be, she draws attention to mixed indices that contain both food and non-food items. (Consider the direct link between corn and ethanol or soy and biodiesel.) “Factors other than food supply and demand are affecting prices and possibly changing production decisions in ways that do not respond to food security needs. It will be a challenge for legislation to separate fuel from food,” she added. Murphy also addressed a discussion on the subject at the International Institute for Sustainable Development in Geneva last week.


To be sure, speculation serves the purpose of ensuring liquidity and aiding price discovery. There is recognition that not all speculation is bad – including those for risk insurance purposes, physical traders who want to hedge their exposure to protect against price fluctuations, among others. Speculation does provide liquidity to hedgers.

The initiative by the socialists does make the distinction between hedging and financial speculators who can sometimes, affect or distort price levels in markets. The targets of the initiative – include investors such as investment funds, banks and financial arms of commodity companies.

The initiative hence seeks no ban on hedging, but on financial speculation.

The only trouble is, it is nearly impossible to differentiate one from another, except by categorising traders as those who have commercial purposes (physical traders) and those who don’t (non-commercial actors like banks). One cannot distinguish a hedging transaction from a speculative trade – apart from intent or motivation for a trade, which hard if not impossible tell.

The vote aims to limit financial speculation by such actors, because they have huge power to influence the markets and hence prices. There is not enough information on the extent of speculative activities that these actors undertake. The government acknowledges this.

Olivier De Schutter, the former United Nations Special Rapporteur on the right to food, explains, “Financial investors have taken an ever more important role, the volumes of financial transactions is now a multiple of the real volumes, and the markets at times therefore come to follow a purely financial or speculative logic.”


Critics of the initiative are of the view that banning speculation, will not address food prices. Trading in agriculture commodities is typically, low margin, high volume transaction, where profits are derived from not just sale of commodities but a range of other factors including land, freight among others.

The government and the industry are wary of the legal uncertainty and costs that will result, in addition to potential job losses, which might result if the initiative gets enough support. Stephane Graber, Secretary General, Swiss Trading and Shipping Association, (STSA) says, “The initiative will result in creating more difficulties for the physical players to access the futures market, since they will need to establish that there are not performing paper trading but the hedging of physical trading”. Hedging activities will move out of Switzerland, threatening jobs, he says. The industry employs 12,500 people directly according to STSA.

The aim of the initiative is to discourage index funds, over the counter derivatives linked to agriculture commodities. SIX platforms, used by private and institutional investors based in Switzerland, are most likely to be affected if the initiative is accepted, the government said last year. But the trading volumes are not that high, it is acknowledged. SIX exchange quotes currently 120 ETFs and 36 exchange traded products in commodities.


If the initiative does get enough support, the government fears that the commodity business might shift to kinder jurisdictions. These fears are possibly overstated. After all, Geneva is also a major centre of trade finance that lubricates capital intensive commodity transactions. Apart from trading companies, the industry is supported by insurance companies, law firms, banks, accounting, forwarding, surveillance and security firms, and shipbuilders.

It is not clear whether a ban in speculation in Switzerland will affect the volume of overall speculation in other centres including New York, Chicago and London. The concentration of trading in a given geographical centre has less importance today, experts observe. Tighter regulations on the commodity business will become a reality in the future that companies will have to contend with, no matter where they are.

It is clear that firms located in Switzerland who trade with agro-derivatives over platforms in the US or the EU must comply with the rules in these jurisdictions, a spokesperson from SECO said.


Regulations are afoot. The Food and Agriculture Organization (FAO) set up the Agricultural Market Information System (AMIS). The Financial Market Infrastructure Act (FMIA), entered into force on 1 January 2016 in Switzerland, which seeks to put the Swiss regulatory environment in line with regulations in the US and the EU. The FMIA includes measures for more transparency and stability of financial markets, as well as position limits.

Olivier Heimgartner, a spokesperson for the Spekulation Initiative said, “Although the act was passed earlier this year, the government has not imposed any position limits.”

Position limits have been suggested so that major financial actors are prohibited from influencing the price variations by the sheer ability they have to mobilize huge funds (that they do not own) to bet on price variations, De Schutter says.

The leading position of Switzerland cannot be understated –  some of the commodities traded in the Geneva region include – 35% of the world’s cereals and oilseeds, 50% of the world’s coffee, 50% of the world’s sugar, 35% of the world’s rice, 35% of the world’s oil, as well as natural gas, ethanol, cotton, among others.

Gilles Carbonnier, Professor, Development Economics, Institut de hautes études internationales et du développement (IHEID), said, “Switzerland has an interest in not only participating in global discussion on the regulation of commodity trade or adapt to global trends and measures in the US or the EU, but also to take a certain lead in views of its position in the market.”

Irrespective of which side wins on Sunday, the Swiss government must take the lead.



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