BRIEFING NOTE 02 - SEPTEMBER 2010 OLIVIER DE SCHUTTER

UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 1

Food Commodities Speculation 

and Food Price Crises

SUMMARY 

In this briefing note, the UN Special Rapporteur on the 

right to food examines the impact of speculation on the 

volatility of the prices of basic food commodities, and 

he identifies possible solutions forward. The global 

food price crisis that occurred between 2007 and 

2008, and which affects many developing countries 

to this day, had a number of causes. The initial causes 

related to market fundamentals, including the supply 

and demand for food commodities, transportation 

and storage costs, and an increase in the price of 

agricultural inputs. However, a significant portion of 

the increases in price and volatility of essential food 

commodities can only be explained by the emergence 

of a speculative bubble. 

In particular, there is a reason to believe that a 

significant role was played by the entry into markets 

for derivatives based on food commodities of large, 

powerful institutional investors such as hedge 

funds, pension funds and investment banks, all of 

which  are generally unconcerned with agricultural 

market fundamentals. Such entry was made possible 

because of deregulation in important commodity 

derivatives markets beginning in 2000. These factors 

have yet to be comprehensively addressed, and to 

that extent, are still capable of fuelling price rises 

beyond those levels which would be justified by 

movements in supply and demand fundamentals. 

Therefore, fundamental reform of the broader global 

financial sector is urgently required in order to avert 

another food price crisis. Previously unregulated 

Over the Counter (OTC) derivatives must be subject 

to rules requiring registration and clearing on public 

exchanges, and exemptions to these rules must be 

highly restricted. As regards commodity derivatives 

trading in particular, States should ensure that dealing 

with food commodity derivatives is restricted as far 

as possible to qualified and knowledgeable investors 

who deal with such instruments on the basis of 

expectations regarding market fundamentals, rather 

than mainly or only by speculative motives. These 

measures would enable States to fulfill their legal 

obligations arising under the human right to food.

Regulation to reduce the risks of price volatility
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 2

THE FOOD PRICE CRISIS OF 2008 

As a result of the increases in prices of basic food 

commodities and oil in 2007-2008, the number of 

people in extreme poverty rose by 130 to 150 million, 

according to an estimate of the World Bank1. At least 40 

million people around the world were driven into hunger 

and deprivation as a result of the 2008 food price crisis, 

raising the total number of people living in hunger to 

963 million in 20082. As is nearly always the case, the 

brunt of the food price spike was borne by people in 

the Low Income Food Deficit Countries (LIFDCs), or the 

poorest developing countries3. In these countries, of 

special concern are the urban and rural poor who even 

at the best of times must spend up to four-fifths of their 

income on food4. The food price crisis undermined this 

already meagre ability to meet essential food needs5. 

This should not be allowed to recur. This note seeks to 

explain the role that speculation on the commodities 

markets may play in increasing volatility of prices, and 

what can be done about it in order to better protect the 

right to adequate food.

Beginning around 2005, markets for numerous 

agricultural commodities started to witness price 

increases and higher levels of volatility (see Figure 1). 

According to a document circulated under the auspices 

of the UN Conference on Trade and Development 

(UNCTAD), food prices rose by 83% between 2005 and 

20086, with maize prices nearly tripling, wheat prices 

increasing by 127%, and rice prices by 170% between 

January 2005 and June 20087. Moreover, the June 

2010 issue of Food Outlook published by the UN Food 

and Agriculture Organization (FAO) finds that implied 

volatility8 in wheat and soy rose steadily from 2005 to 

2008, and that the rise in implied volatility for maize 

continued, albeit at a much lower rate, until 20099. 

At present, there is a lively debate as to whether these 

developments were the result of factors adversely 

affecting food supply, or whether they were caused by 

excessive speculation in food commodities derivatives 

(see page 9). Advocates of the first position maintain 

that the price spikes were attributable to factors such 

as a decline in the rate of growth of food production10, 

climate change and water depletion11, and the growth 

of biofuels12. For instance, Wright and Bobenrieth argue 

that the roots of the food price crisis lie in the fact that 

between 2007 and 2008, stocks of world wheat, maize 

and rice were low13. Wheat production, they note, was 

lower than expected because of a severe drought in 

Australia, and (according to the IMF14) consumers in 

China and India developed a taste for meat which drove 

up grain prices15. 

Rice

340.0

290.0

240.0

190.0

140.0

90.0

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

Wheat

Maize

Figure 1 - Index numbers of world trade prices

Source: Jayati Ghosh, “The unnatural coupling: Food and Global Finance” (2010), at 76. Using data accessed on 29 March 

2009, from: http://faostat.fao.org/.
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 3

developments, the UNCTAD Trade and Development Report 

2009 found that “the trend towards greater financialisation 

of commodity trading is likely to have increased the number 

and relative size of price changes that are unrelated to market 

fundamentals”24. In other words, the changes in food prices 

reflected not so much movements in the supply and/or demand 

of food, but were driven to a significant extent by speculation 

that greatly exceeded the liquidity needs of commodity 

markets to execute the trades of commodity users, such as 

food processors and agricultural commodity importers. 

In fact, while the food price crisis may have been sparked off the 

abovementioned developments affecting demand and supply, 

its effects were exacerbated by excessive and insufficiently 

regulated speculation in commodity derivatives. The 

promotion of biofuels and other supply shocks were relatively 

minor catalysts, but they set off a giant speculative bubble 

in a strained and desperate global financial environment. 

These factors were then blown out of all proportion by large 

institutional investors who, faced with the drying up of other 

financial markets, entered commodity futures markets on a 

massive scale. Therefore, the policy solutions that are needed 

to avert another crisis must address both the problems 

affecting underlying financial market fundamentals, and the 

conditions under which speculation is allowed to take place in 

essential food commodities, thereby exacerbating the effects 

of those movements in market fundamentals.

SPECULATION IN AGRICULTURE

Speculation in agricultural derivatives has an ancient history. 

One of the earliest descriptions of derivatives is to be found 

in Aristotle’s Politics25. Aristotle tells of Thales the Milesian, 

a professional philosopher who began to tire of being mocked 

for his poverty. His meteorological expertise lead him to 

anticipate a bumper olive harvest that year, so he hired all the 

oil presses in Chios and Miletus for the relevant period. The 

owners of the oil presses were glad to sell him those rights 

in exchange for cash up front. When the bumper harvest 

materialized as Thales correctly predicted, he exercised his 

“option” and became a very rich man, thus demonstrating 

that “philosophers might be rich if they pleased, but that 

riches were not the object of their pursuit”26. 

Traditional speculation

Traditional speculation in agricultural commodities markets 

is based on market fundamentals – above all on the demand 

and supply for any particular commodity. Thales purchased 

his option on the oil presses because he expected the supply 

of olives to increase. The farmers sold him the option because 

the were hedging against the risk of a poor olive harvest. This 

form of speculation is generally considered necessary and 

useful in the market: it facilitates commercial hedging against 

risk, and it allows for price discovery, assisting farmers and 

Insufficient explanations

Certainly, supply and demand fundamentals played an 

important role in the creation of the food crisis. However, 

closer examination reveals that the abovementioned 

arguments of supply and demand are insufficient to explain 

the full extent of the increases and volatility in food prices. 

For instance, the price of rice rose by 165% between April 

2007 and April 200816 - a magnitude difficult to explain 

by reference to market fundamentals. In fact, Wright and 

Bobenrieth acknowledge that “rice stocks were not unusually 

low in 2007/2008” and that even though maize stocks were 

low, production remained high17. Nor, as Wahl observes, is it 

likely that a group of people suddenly developed a taste for 

consuming vast quantities of dairy products, driving its price 

up by 157% between 2006 and November 2007, only to 

lose it starting from July 2008, allowing prices to start falling 

again18.

It is also difficult to accept the IMF’s thesis that the food price 

increases were the result of per capita income growth in China, 

India, and other emerging economies which fed demand for 

meat and related animal feeds such as grains, soybeans, 

and edible oils. That interpretation is not corroborated 

by data collected by the FAO for the period concerned: 

that data shows variously, that the supply and utilization 

of wheat and coarse grain increased at roughly uniform 

rates, that end of season stocks for grains had generally 

increased significantly, and that China and India exhibited 

falling aggregate and per capita food grain consumption19.

The speculative bubble effect

Instead, a number of signs indicate that a significant portion 

of the price spike was due to the emergence of a speculative 

bubble. Prices for a number of commodities fluctuated too 

wildly within such limited time-frames for such price behaviour 

to have been a result of movements in supply and demand: 

wheat prices, for instance, rose by 46% between January 10 

and February 26, 2008, fell back almost completely by May 

19, increased again by 21% until early June, and began falling 

again from August20. The 2008 food price crisis was unique 

in that it was possibly the first price crisis that occurred in an 

economic environment characterized by massive amounts of 

novel forms of speculation in commodity derivative markets. 

The particular area of concern is speculation in derivatives 

based on food commodities. A study conducted by Lehman 

Brothers just before its bankruptcy revealed that the volume of 

index fund speculation increased by 1,900% between 2003 

and March 200821. Morgan Stanley estimated that the number 

of outstanding contracts in maize futures increased from 

500,000 in 2003 to almost 2.5 million in 200822. Holdings 

in commodity index funds ballooned from US$ 13 billion in 

2003 to US$ 317 billion by 200823. In the light of such 
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 4

futures that comprise the basket of futures that make up any 

particular commodity index. 

Even though they were advertised to institutional investors 

as ideal mechanisms for hedging against adverse movements 

in other financial markets36, it could be said that the 

animating principle behind the commodities index funds 

was momentum. The strategy evolved by the Goldman Sachs 

managers who ran the GSCI was to have nothing but “long” 

positions, to keep on acquiring them, and to “roll” them over 

as they expired, no matter how high the price of those futures 

climbed. As Kaufman puts it, the purpose was to accumulate 

“an everlasting, ever-growing long position, unremittingly 

regenerated”37. 

As mentioned above in the section on speculation based on 

market fundamentals, speculation can be useful because 

it helps farmers and buyers determine prices. As such, 

ordinarily, futures prices are lower than spot prices, and this 

ordinary situation is known as “normal backwardation”38. 

However, the effect of the commodities index funds appears 

to have been to throw the commodities futures markets into 

“contango”39, producing a vicious circle of prices spiraling 

upward: the increased prices for futures initially led to small 

price increases on spot markets; sellers delayed sales in 

anticipation of more price increases; and buyers increased 

their purchases to put in stock for fear of even greater future 

price increases40. As is demonstrated by Figure 2, when the 

spot prices increased, this fed an increase in futures prices, 

which attracted even more speculation, thus setting the whole 

process into motion once again. Indeed, the whole structure 

of commodity index speculation was premised upon contango. 

Commodity index speculation was the gift that was designed 

to keep on giving.

It is difficult to imagine creatures more different from Thales 

than the index speculator and the manager of a commodities 

index fund. The index speculator and the fund manager, 

far from being acquainted with crop production cycles and 

patterns, will never see a grain of wheat in their professional 

lives. Nevertheless, the index speculator and the fund manager 

have one thing in common with the traditional speculator: 

whereas the traditional speculator may drive up the price of 

a commodity by hoarding the physical commodity, the index 

speculator and the fund manager accomplish the same by 

hoarding futures contracts for those commodities41. However, 

the index speculator and fund manager are spared the bother 

of maintaining a warehouse: their hoarding is entirely virtual.

It is important to note that different kinds of speculation in 

different markets combined to create the food price crisis, and 

that no one category of market conduct was singly responsible. 

For instance, market momentum-based speculation in oil 

contributed to the food price crisis, by affecting fundamental 

conditions of supply of an essential agricultural input. Petrol 

is an integral component of modern food supply chains, 

buyers in discovering the reasonable price for a particular 

commodity in individual trades and on spot markets27. If the 

buyer is willing to offer a higher price for a future than before, 

it means that she expects the eventual price of the commodity 

to increase further. As such, if the price of commodity futures 

goes up, it signals to sellers on spot markets to raise their 

prices. Indeed, the grain futures prices quoted by the Chicago 

Mercantile Exchange28 tend to be incorporated directly 

into grain trade contracts the world over. Moreover, it is 

conventionally thought that such speculation reduces price 

volatility, because speculators provide a market for hedgers, 

and because they buy when the price is low and sell when the 

price is high, thus evening out extremes of prices29.

Of course, such speculation is not an unalloyed blessing: it 

can have significant price effects without adding anything 

of economic value30. A speculator, unlike other investors 

in agriculture, does not create new capital such as barns or 

tractors. If that speculator goes bankrupt, her creditors will 

have nothing they may satisfy their debts upon31. It can 

also be extremely dangerous – the terrible Bengal famine 

of 1943 in which 3 million people died, occurred to a large 

extent because grain traders hoarded essential food grains 

in anticipation of future higher prices32. Such hoarding 

exacerbated the price spike, thus denying the poorest sections 

of society access to food. 

Momentum-based speculation

Another form of speculation is based simply on market 

momentum. This has been described as “herding behaviour 

in times of strong (usually upward) price trends, which in 

developed and easily accessible markets can result in the 

emergence of speculative bubbles...”33. Far from providing 

a stabilizing hand, such speculation tends to increase price 

volatility34. Such momentum-based speculation may have 

been the main cause of the food price crisis in 2007-2008. 

The particular derivative instruments that require our special 

attention are the commodity indexes. A commodity index, put 

simply, is a mathematical value largely based on the returns of 

a particular selection of commodity futures. The most famous 

of these is the S&P GSCI, formerly known as the Goldman 

Sachs Commodities Index, which was set up by Goldman 

Sachs in 1991. Others include the Dow Jones-AIG Index and 

the Rogers International Commodities Index. The composition 

of the basket of commodity futures varies according to the 

index, but agricultural commodities normally do not account 

for the majority of the commodities included in the “basket”. 

For instance, agricultural commodities only make up 12.2% 

of the value of the S&P GSCI35. Commodities indexes 

themselves form the basis for a number of instruments such 

as commodities index funds, commodity exchange traded 

funds (ETFs), and commodity index swaps. For instance, a 

commodity index fund is a large sum of money managed by 

a “sophisticated” manager, who uses that money to buy the 
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 5

or regulatory oversight44. Moreover, the Act permitted for the 

first time OTC derivatives contracts where neither party was 

hedging against a pre-existing risk; i.e. where both parties 

were speculating. Also, it enabled to hedge against those risks 

by taking positions on exchanges.

At this point, it is crucial to observe the difference between 

investment in commodities futures and investment in 

commodity index funds. Commodities futures, being 

standardized contracts, are traded on exchanges, so 

investment in them is not OTC. Participation in a commodities 

index fund, however, is mostly OTC45. Institutional investors 

such as pension funds, typically enter into agreements with 

fund managers whereby in addition to the investor paying an 

annual management fee to the manager, it also pays the fund 

manager the 3-month Treasury Bill rate. In exchange, the fund 

manager pays the total return on the futures included in the 

commodities index. Such agreements to exchange streams 

of income, or “swaps” are almost always traded on an OTC 

basis46. The lack of regulation of such derivatives greatly 

facilitated the entry of institutional investors into commodities 

index funds.

To summarise, deregulation in the US allowed purely 

speculative OTC derivatives to be hedged on exchanges, and 

being used for fertilizers, food processing and transportation, 

and the rise of bioenergy leads to an increased merger of 

the food and energy markets42. Moreover, small changes in 

market fundamentals such as oil price increases, the growth 

of agrofuels, and underinvestment in agriculture can act as 

a catalyst for momentum-based speculation. The fact that 

market-momentum based speculation may have been the 

main contributing cause of the food price increases is no 

reason to lower one’s guard against other factors which also 

cause food prices to rise. Indeed, we should be ever more 

vigilant, because momentum-based speculation may magnify 

the effects of changes in market fundamentals.

THE LARGER FINANCIAL MARKET

The sudden massive entry of index funds into commodities 

should be placed against the background of developments in 

the broader financial markets. Following the passage of the 

U.S. Commodity Futures Modernization Act in 2000, Over The 

Counter (OTC)43 derivatives were exempted from the oversight 

of the U.S. Commodity Futures Trading Commission (CFTC). 

As a result of the Commodity Futures Modernization Act and 

the decisions of the CFTC, such trading was allowed to take 

place without any position limits, disclosure requirements, 

700

600

500

400

300

200

100

Others

DJ-AIG

SP-GSCI

S&P GSCI

S&P GSCI spot price commodity index

Commodity index “investment”

(Billions of Dollars)

$300

$250

$200

$150

$100

$50

$-

1970197219741976197819801982198419861988199019921994199619982000200220042006

Mar-2008

Figure 2 - Commodity index investment compared to S&P GSCI spot price commodity index

Source: Jan Kregel, “The impact of changing financial flows on trade and production in developing countries” (August 6–7, 

2008) Presentation to Seminar on “Estructura productiva y dinámica de precios: efectos macro-micro y respuestas de política” 

Escuela de Verano de Economías Latinoamericanas, CEPAL, Santiago, Chile.
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 6

POLICY RESPONSES

The 2008 food price crisis arose because a deeply flawed 

global financial system exacerbated the impacts of supply 

and demand movements in food commodities. Reforming the 

global financial system should therefore be seen as part of the 

agenda to achieve food security, particularly within poor net 

food-importing countries. 

US & EU initiatives

The recent Dodd-Frank Act54 on financial reform passed by 

the U.S. Congress is encouraging in this regard. With specific 

relation to agricultural commodities, the Dodd-Frank Act sets 

out a new Section 4a(c) of the Commodity Exchange Act 

(CEA), which requires the CFTC to establish, within 270 days 

of the passage of the Act, limits on the number of agricultural 

commodities that can be held by any one trader, as well as 

on energy related commodities and futures. It also requires 

the CFTC to establish limits on the aggregate number or 

amount of positions in certain contracts based upon the same 

underlying commodity that may be held by any one person, 

including any group or class of traders, for each month. It is 

to be hoped that the CFTC does not set those limits so high 

as to be meaningless. On the other hand, the Dodd-Frank Act 

has not brought about the structural changes in the financial 

markets many had hoped for; in particular, the “Volcker rule” 

announced by President Obama in January 2010, which was 

intended to prevent banks from using taxpayer-backed funds 

to speculate on financial markets and give up their stakes in 

hedge funds and private equity funds55, has been severely 

watered down in the Act56. 

In the European Union, Michel Barnier, the EU Commissioner 

for the Internal Market and Services, announced on 15 

September 2010 a Proposed Regulation on OTC derivatives, 

central counterparties and trade repositories57. This proposed 

regulation imposes mandatory reporting and clearing (where 

possible) of OTC derivatives, and stipulates that “nonfinancial actors” will be subject to the same rules as “financial 

actors” if they meet certain thresholds. More specifically, 

an information threshold is proposed, which will allow 

financial authorities to identify non-financial actors that have 

accumulated significant positions in OTC derivatives, and 

a clearing threshold, which, if exceeded, will render a nonfinancial actor subject to the clearing obligation58. Moreover, 

the proposal draws a distinction between commercial and 

financial actors by stipulating that “in calculating the positions 

for the clearing threshold, derivatives contracts should not be 

taken into account if they have been entered into to cover the 

risks from an objectively measurable commercial activity.”59

The proposed regulation will place obstacles in the path 

of index speculators’ participation in commodity index 

funds. However, these obstacles do not appear to be 

insurmountable: the CME group, for instance, has already 

institutional investors participated in commodity index funds 

by arranging OTC swaps. Understandably, the number of 

futures and options traded globally on commodity exchanges 

increased by more than five times between 2002 and 200847. 

The value of outstanding OTC commodity derivatives grew 

from 0.44 trillion in 1998, to 0.77 trillion in 2002, to more 

than US$ 7.5 trillion in June 200748. 

Beginning at the end of 2001, food commodities derivatives 

markets, and commodities indexes in particular began to 

see an influx of non-traditional investors, such as pension 

funds, hedge funds, sovereign wealth funds, and large banks 

that packaged and dealt the commodity index instruments 

mentioned above49. The reason for this was simply because 

other markets dried up one by one: the dotcoms vanished at 

the end of 2001, the stock market soon after, and the U.S. 

housing market in August 2007. As each bubble burst, these 

large institutional investors moved into other markets, each 

traditionally considered more stable than the last. Strong 

similarities can be seen between the price behaviour of food 

commodities and other refuge values, such as gold. As the 

European Commission notes, the prices of both had been 

largely stable, began to rise slowly in 2005, and accelerated 

sharply in August 2007, when the subprime crisis hit50. 

Similar behaviour obtained in oil markets, which hit the $100 

per barrel mark in February 2008 and peaked in June 2008, 

only to fall back subsequently. 

In none of these markets was there any restriction of supply 

or expansion in demand even remotely sufficient to explain 

the full extent of price increases. The reasons for such 

movement were twofold. First, because it was thought that 

markets for food and oil would be profitable because they 

could not possibly dry up: people may lose interest in assetbacked securitization, but they will always have to eat51. 

Second, as mentioned earlier52, a portfolio diversification 

practice appears to have emerged of spreading out risk in 

any investment portfolio by balancing out investments in 

securities or bonds with investments in markets that display 

unrelated or opposite behaviour, such as food and oil. Indeed, 

total index-fund investment in corn, soybeans, wheat, cattle 

and hogs increased from US$ 10 billion in 2006 to more than 

US$ 47 billion in 200753. 

But these price increases in commodities futures were 

possible only if the permanent long positions in them could 

be funded. Previously, this had been made possible by the 

low margins that traders had to put up front in order to trade 

on commodities exchanges. The remainder of the funds could 

be invested in other financial instruments. The food price 

bubble burst when the giant non-traditional speculators lost 

the ability to carry on, as a result of their investments in other 

markets crashing. When they fell, the upward food price spiral 

also ended.
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 7

not the trader is financial or commercial could at least be 

indicative of whether or not the transactions being carried 

out are likely to be manipulative. 

n Most importantly, regulators should recognize that there are 

fundamental conceptual differences between commodity 

derivatives and financial derivatives. They should not be 

treated as belonging to the same category of instruments. 

In order to ensure that such regulatory conflation does 

not occur, it may be appropriate to assign the task of 

commodity derivatives regulation to a separate institution 

staffed specifically with experts in commodity markets.

n Once the distinction is made, access to commodities 

derivatives markets could be restricted to traders and 

specialist brokers. A number of proposals could be 

considered, such as an outright ban on momentum-based 

speculation, and the compulsory registration of actors 

trading on commodity futures markets, in order for such 

exchanges to exclude financial traders69. 

n In addition, certain regulatory steps could be taken to 

reduce the incentives for financial speculation. Among 

such measures are the establishment of spot platforms, as 

experimented by the Ethiopia Commodity Exchange70; the 

imposition of compulsory delivery, preventing traders from 

settling their obligations in cash; and, as proposed earlier 

by the Special Rapporteur, the imposition of higher margins 

(for instance, from 10 to 30 per cent as down payment), 

thus forcing speculators to make a larger down payment for 

their speculation71. 

n Aside from these regulatory changes, strengthening of 

spot markets may be brought about by investing in better 

warehousing facilities, communications services and in 

transport infrastructure72. Such steps will not only reduce 

the influence of non-commercial commodity futures traders, 

and increase the participation of farmers on such markets, 

but will also improve the ability of commodity futures to act 

as price signals. 

This is to be desired even if one rejects the speculationbased explanation for the food crisis. It may be noted that 

the Abhijit Sen Committee Report to the Indian Ministry of 

Consumer Affairs, Food & Public Distribution called for such 

strengthening of spot market73, even though it found that 

speculation in commodity futures did not fuel inflation in food 

prices74. 

n At the same time, spot market regulation would be necessary 

in order to ensure that the delivery requirements do not 

result in hoarding75. As illustrated by the cornering of the 

cocoa market by Armajaro described above, our concern 

should encompass not just financial traders, but also 

speculation by commercial ones in the form of hoarding. 

The Special Rapporteur believes that spot markets should 

be made transparent, so that the holdings of any single 

trader are known to all, and that there should be more 

successfully developed cleared commodity index swaps60. 

Moreover, there may be a difference between the “position 

limits” imposed by the Section 737 of the Dodd-Frank Act, 

and the “concentration limits” imposed by Article 44 of 

the proposed regulation. The former provision sets out clear 

restrictions, while the latter appears to set out more variable, 

individualized limits that could be subject to dispute61. The 

goal of commodity derivatives reform is not to inconvenience 

financial speculation in commodities, but to limit, control, 

or even prohibit it outright. As such, it cannot be said that 

the proposed regulation tackles the subject of speculation in 

commodities directly. 

In general, the EU has yet to act as boldly as the US with 

specific regard to speculation in food commodities, although 

the consequences of inaction are equally considerable: 

London is the world’s largest agricultural commodities market 

outside the US62. Despite various calls denouncing the impact 

of speculation in foodstuffs63, such as the demarche by the 

French government to the European Commission64, European 

regulation of commodities trading remains insufficient. In 

July 2010, Andrew Ward, the manager of Armajaro, a Londonbased hedge fund, purchased US$ 1 billion (€770 million) 

worth of futures contracts for 241,000 tons of cocoa. This 

represented about 7% of the world’s annual output of cocoa, 

and is enough to supply Germany for an entire year. Even 

more amazingly, the contracts were for delivery, which means 

that Armajaro owned almost all the cocoa beans sitting in 

warehouses all over Europe. Although the announcement of 

good harvests ensured that the spot prices did not rise as 

Armajaro had hoped, that such hoarding is permitted in this 

day and age stretches belief.

Possible improvements

In general, certain steps could be taken to prevent improper 

speculation in the commodities derivatives markets. 

n Certain important regulatory bodies comprise too few 

experts in commodity markets65: a first improvement could 

be simply to begin remedying this imbalance. 

n Next, all regulators should distinguish between traders 

hedging against genuine commercial risks from nontraditional, market momentum-based speculators 

interested simply in making gains on price changes. 

Whereas the U.S. CFTC does this66, others, such as 

the U.K. Financial Services Authority (FSA), do not. For 

instance, the FSA does not “consider activity by financial 

participants to be de facto manipulative”67. As such, it 

does not “therefore consider that there should necessarily 

be a distinction made between ‘large speculative’ and ‘large 

non-speculative’ positions for the purposes of combating 

manipulation – the focus should be on combating ‘large 

positions that lead to manipulation’ irrespective of whether 

they are held by financial participants or not”68. Yet, in the 

view of the Special Rapporteur, the question of whether or 
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UNITED NATIONS SPECIAL RAPPORTEUR ON THE RIGHT TO FOOD

Food Commodities Speculation and Food Price Crises 8

Although the global stocks of grain are higher now than they 

were previous to the 2007-2008 food crisis, the financial 

drivers of that crisis remain largely unchanged. More still 

needs to be done to curb the negative effects of speculation 

on basic food commodities. This is an important source 

of vulnerability, particularly, for poor net food-importing 

countries, whose dependency on food imports has been 

increasing over the years, and who will in the future suffer 

more balance of payments problems if they are confronted 

with a new peak in prices over the coming weeks and months. 

Recommendations:

1. Given the numerous linkages between agriculture, oil, and 

other financial markets demonstrated above, comprehensive 

reform of all derivatives trading is necessary. The very first 

step would be to require registration, as well as clearing 

to the maximum extent possible of OTC derivatives, so 

that there is real time reporting of all transactions made, 

without information privileges for OTC traders, and in order 

to allow for effective supervision. The small minority of 

derivatives that cannot be cleared must nevertheless be 

reported without a time lag.

2. Regulatory bodies should carefully study and acquire 

expertise in commodity markets, instead of regulating 

commodity derivatives and financial derivatives as if they 

were the same class of assets. It may be appropriate to 

assign the task of regulating commodity derivatives to a 

specific institution staffed with experts in commodity 

regulation, rather than have a single body regulating both 

financial and commodity derivatives.

3. Access to commodities futures markets should be 

restricted as far as possible to qualified and knowledgeable 

investors and traders who are genuinely concerned about 

the underlying agricultural commodities. A significant 

contributory cause of the price spike was speculation by 

institutional investors who did not have any expertise or 

interest in agricultural commodities, and who invested in 

commodities index funds because other financial markets 

had dried up, or in order to hedge speculative bets made 

on those markets. 

4. Spot markets should be strengthened in order to reduce 

the uncertainty about future prices that creates the need 

for speculation. However, these markets must also be 

regulated in order to prevent hoarding. Spot markets must 

be transparent, and holdings should be subject to strict 

limits in order to prevent market manipulation.

5. Physical grain reserves should be established for the 

purpose of countering extreme fluctuations in food price, 

managing risk in agricultural derivatives contracts, and 

discouraging excess speculation, as well as meeting 

emergency needs. Such measures and the abovementioned 

reform of commodity derivatives markets should be seen as 

complementary.

transparency also about the strategic reserves held by 

States. Second, strict position limits should be placed on 

individual holdings, such that they are not manipulative.

INTERNATIONAL COOPERATION

There is a role for international cooperation in this regard. 

The ability of individual countries to feed their populations 

could be bolstered by setting up food and grain reserves. 

The establishment of food reserves would at least assist in 

addressing the relatively small supply and demand movements 

or the impact on supply of events such as droughts or floods 

that speculators latch upon, thus reducing levels of price 

volatility76. The efficacy of such food reserves would be 

enhanced if they were established at regional and not just 

at national level, or if countries exchanged information about 

their food reserves and insured each other against price 

volatility by mutualizing such food reserves77. But improved 

regulation preventing large financial actors from influencing 

the commodity futures markets would also significantly limit 

volatility78. 

Other initiatives presently extant at the international level are 

compensatory financing schemes such as the EU’s STABEX 

and FLEX schemes79, the IMF’s Compensatory Financing 

Facility (CFF) and Exogenous Shock Facility (ESF)80, and 

the Food Financing Facility (FFI) mooted in the Marrakech 

Decision and the WTO Ministerial Conference at Doha. They 

aim simply to help countries avoid the adverse impact on 

growth as a result of food price volatility, such as, for instance, 

by giving access to short-term loans. This however does not 

address the increased volatility itself, when it is caused by 

speculation. As such, the international community needs, as 

a matter of priority, to explore alternative methods by which 

the underlying speculation-based causes of food price spikes 

can be addressed.

CONCLUSION

Action to address the dangers of speculation in basic foodstuffs 

is needed. Although considerable progress appears to have 

been achieved in this regard with respect to financial reform 

in the US, most other regions in the world, including the EU, 

still lag behind. The fundamental structure of global financial 

markets appears to be little different from before the food 

prices crisis of 2007-8, the lessons of which we have failed 

to learn. It is crucial that we do so, because we once again 

find ourselves in a situation where basic food commodities 

are undergoing supply shocks. World wheat futures and spot 

prices climbed steadily until the beginning of August 2010, 

when Russia, faced with massive wildfires that destroyed its 

wheat harvest, imposed an export ban on that commodity81. 

In addition, other markets such as sugar and oilseeds are 

witnessing significant price increases82. 
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Food Commodities Speculation and Food Price Crises 9

DERIVATIVES AND THEIR USES

What are derivatives?

A derivative is “a financial instrument whose value depends on (or derives from) the values of other, more basic 

underlying variables”83: it is therefore a financial instrument “which has a value determined by the price of 

something else”84. This “something else” can be almost anything: it can be assets or commodities such as oil 

or wheat, or financial instruments such as securities or indices. 

To illustrate, a potato farmer and a buyer may enter into a contract for the sale and delivery of a quantity of 

potatoes well before a single potato comes into existence. The farmer will enter into this contract if he thinks 

that the price offered by the trader at that point in time is greater than what he will get when he sells the actual 

potatoes on the “spot” market. He has the security of a fixed price, and has transferred the risk of a fall in potato 

prices to the buyer. The buyer may enter into this contract perhaps because she expects the opposite behaviour 

on the spot market. Or, she may be under a contractual obligation to yet another person to produce a certain 

quantity of chips at a particular time, and therefore needs to be certain that she will have the necessary potatoes 

at hand. In any case, there is a difference in expectations: the farmer thinks prices may fall as a result of an 

oversupply of potatoes, and the buyer thinks the prices may rise as a result of undersupply. 

The variety of types derivatives is potentially infinite. However, most derivatives fall under, or are variants of one 

of the following three categories:

1. Forward Contracts and Futures: The contractual arrangement described in the above paragraph is the kind 

of derivative known as a “forward contract”. Forward contracts whose terms are standardized sufficiently for 

them to be bought and sold on exchanges are known as “futures”. The means by which transactions between 

countless “farmers” and “buyers” is coordinated is by having all the “farmers” sell to a clearing house, and 

all the “buyers” buy from that same clearing house. That clearing house then owes corresponding obligations 

to the “farmers” and the “buyers”. 

2. Options: Imagine the same scenario between the potato farmer and the buyer, but with one difference: 

instead of purchasing the potatoes, the contract gives the buyer the choice whether or not to purchase the 

potatoes at a pre-determined price. If potato prices in the future spot market are higher than the price the 

buyer has negotiated with the farmer (to which the fee the buyer pays the farmer in exchange for the option 

should be added), the buyer will exercise the option. If the rise in prices does not materialize, then he will 

let the option lapse and will incur a loss on the option fee. An option to buy an asset is known as a “call” 

option, while an option to sell an asset is a “put” option. 

3. Swaps: To demonstrate this category of derivatives, imagine that the counterparties hold an asset that 

produces a stream of income over time. For example, counterparty X may hold a bond which bears a fixed rate 

of interest, while counterparty Y owns a similar security, but which pays a floating rate of interest pegged to 

the performance of a certain index. X may think that the stream of income coming from Y’s asset will be worth 

more in the future, because a rising rate of inflation will make the fixed interest payments of X less valuable. 

Y may think that X’s stream of income will be more valuable in future, because Y has reason to think that 

the value of the particular index her security is pegged to will crash shortly. Thus, they will “swap” the cash 

flows deriving from their assets with each other. It is possible to make a swap between two floating streams 

of income, because difference actors have a different relationship to risk and, based on the information 

they possess, have different anticipations about the future. The only swap that makes no sense, for obvious 

reasons, is one between two streams of income fixed at a certain rate in the same currency.
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How are derivatives used?

As can be seen in the example of the potato farmer and the buyer, derivatives can be used for two purposes. 

The farmer who enters into the forward contract in order to avert the risk of a fall in future potato prices, and 

the buyer who does the same in order to ensure a future supply of a quantity of potatoes or their money’s worth 

are hedging against risks: both prefer the security of a predefined price to the risks of having to sell at a lower 

price (or of having to buy at a higher price). On the other hand, the buyer who enters into the forward contract 

simply because she thinks the price offered now is better than that which will obtain in future, is speculating in 

the hope of a profit. She is making a bet, pure and simple. The following suitable definition is provided by the 

European Commission: “a speculator is an investor... who purchases/sells (a derivative) in order to sell/purchase 

it later (usually before expiry) for the purpose of profiting from the intervening price changes”85. 

However, it is extremely difficult in practice to know whether a particular trader is hedging or speculating, since 

the mediation of a clearing house, which, as mentioned above, is meant to standardize all contracts, necessarily 

has the effect of making background information about each individual trade opaque to public view. The best 

regulators can do is to train their focus upon the trader. One solution is to vet traders at the very outset: before 

they can trade on an exchange. The CFTC does this by separating commercial traders from non-commercial 

traders. Alternatively objective determination of the trader may be obtained by considering the size of the 

trades, as well as their frequency. Does she have sufficient other assets relative to the size of the position in 

order to give rise to the inference that she is protecting her investment in those other assets thereby? Or, judging 

by the trader’s profile, does it look as if the contract is itself the trader’s main interest? To illustrate, consider a 

man who buys an insurance policy on a house. If the house is worth $50,000, and the policy is for about the 

same amount, then one can infer that he is hedging against the possibility that the house might burn down. If 

the policy is for $100,000, then one can infer that he is positively betting that it will burn down. 

A third reason traders have for finding derivatives attractive arises from the fact that they are much more liquid 

as investments than the underlying assets, commodities or instruments. For instance, taking the example of 

speculative buyer, we can assume that she has no interest in actually taking delivery of the tonnes of potatoes. 

She will have “evened up”, i.e. negotiated a corresponding contract with another person who actually requires 

potatoes for some reason. The farmer will in practice deliver the potatoes to directly to this third person, but 

the payment obligations will nevertheless remain triangular. The buyer thus enjoys greater trading efficiency, 

because she merely makes (or loses) money without going through the trouble of receiving and storing any 

quantity of potatoes. Derivatives thus facilitate the “free trading of risk components”86. With regards to markets 

for agricultural food commodities markets, the FAO observes that only 2% of all futures contracts result in the 

delivery of the underlying physical commodity. This makes trading such futures attractive to investors who have 

no interest in the commodity, but only in making a speculative gain87.

Notes

1. World Bank, Global Economic Prospects. Commodities at the Crossroads, 2009 (based on evidence available until 30 November 2008), 

96. For an overview of the impacts of the crisis and of possible remedies, see Special Rapporteur on the right to food, Report to the 12th

session of the Human Rights Council, Crisis into opportunity: reinforcing multilateralism, A/HRC/12/31 (21 July 2009)

2. FAO, Number of Hungry People Rises to 963 Million, (December 2008). 

3. See I. Maros and W. Martin, “Implications of Higher Global Food Prices for Poverty in Low Income Countries” (2008) World Bank Policy 

Research Paper No. WPS 4594.

4. See T. Hertel, P. Preckel, J. Cranfield and I. Maros, “The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty” 

(2004) The World Economic Review, 18(2).

5. See generally UNCTAD, “The Least Developed Countries Report 2008” (2008).

6. A. Mittal, “The 2008 Food Price Crisis: Rethinking Food Security Policies”, (June 2009) G-24 Discussion Paper Series No. 56, 

UNCTAD, 1.

7. Id.

8. Implied volatility refers to the market’s expectations of the extent to which the price of a particular commodity will change in future. It is 

“implied” because such changes cannot be observed directly, being future events, but are implied from the prices of derivatives based 

those commodities.
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Food Commodities Speculation and Food Price Crises 11

9. FAO, Food Outlook, (June 2010), 98.

10. Trostle estimates that whereas the production of grains and oilseeds grew on average 2.2% p.a. between 1970 and 1990, the rate of 

growth declined to 1.3% p.a. after 1990. Moreover, it is estimated that it will decline further to 1.2% p.a. between 2009 and 2017. See

R. Trostle, “Global Agricultural Supply and Demand: Factors contributing to the Recent Increase in Food Commodity Prices”, (2008) 

WRS-0801, Economic Research Service, USDA.

11. FAO, Crop Prospects and Food Situation, (February 2008); Mittal, supra note 6, 3.

12. See D. Mitchell, “A Note on Rising Food Prices” (July 2008) World Bank, Development Prospects Group, Policy Research Working Paper 

4682: arguing that the large increase in biofuel production in the U.S. and the E.U. was the most important factor behind the food 

crisis.

13. B.D. Wright & E. Bobenrieth, “Special Feature: The Food Price Crisis of 2007/2008: Evidence and Implications” (December 2010) FAO 

Food Outlook 59, 62.

14. IMF, World Economic Outlook (2008).

15. Wright and Bobenrieth, supra note 13, 64.

16. P. Wahl, “Food Speculation as the Main Factor of the Price Bubble in 2008”, (February 2009) Briefing Paper, World Economy, Ecology 

& Development, 6 – 7.

17. Wright & Bobenrieth, supra note 13, 64.

18. Wahl, supra note 16, 7.

19. See FAO Crop Prices and Food Situation (2008), “Table 2: Basic Facts of the World Cereal Situation”, at: http://www.fao.org/docrep/011/

ai476e/ai476e04.htm; J. Ghosh, “The Unnatural Coupling: Food and Global Finance” (2010) Vol. 10 Journal of Agrarian Change, 72, 

at 72, 81; and S. Schulmeister, “Asset Price Fluctuations, Financial Crises and the Stabilizing Effects of a General Transactions Tax” 

in M. Balling, J.M. Berk, & M. Strauss-Kahn eds., The Quest for Stability: A View of Financial Institutions (2010) (SUERF, Vienna), 

99 – 130.

20. J. Ghosh, “The Commodity Price Roller Coaster” (2008), 4.

21. Wahl, supra note 16, 11.

22. T. Lines, “Speculation in food commodity markets”, (April 2010) World Development Movement, 1.

23. F. Kaufman, “The Food Bubble: How Wall Street starved millions and got away with it” (July 2010) Harper’s Magazine, 32.

24. UNCTAD, Trade and Development Report (2009).

25. Aristotle, Politics, Volume 2, Book I, trans. John Gillies, (London, 1813) 53 – 54.

26. Id., 54.

27. EU Commission, “Is there a Speculative Bubble in Commodity Markets?”, Commission Staff Working Document, Task force on the role 

of speculation in agricultural commodities price movements, SEC(2008)2971, 3, 1.

28. In 2007, the Chicago Mercantile Exchange acquired the Chicago Board of Trade, which was the world’s first major exchange for 

derivatives trading.

29. See e.g. J.S. Mill, Principles of Political Economy with Some of Their Applications to Social Philosophy (1848) Charles C. Little & James 

Brown, Boston, Mass., 535.

30. Wahl, supra note 16, 9.

31. Id., 10

32. A.K. Sen, Development as Freedom, (1999) Oxford, 167.

33. EU Commission, “Is there a Speculative Bubble in Commodity Markets?”, supra note 27, 1.

34. See S. Newman, “The New Price makers: An investigation into the impact of financial investment on coffee price behaviour” (2009) 

NCCR Trade Working Paper No. 2009/7. See also Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural 

Commodity Prices (“Abhijit Sen Committee Report”), (2008) Ministry of Consumer Affairs, Food & Public Distribution, Government 

of India, ¶ 11.9: “A study of the functioning of existing futures markets and contracts suggests that although the volume of futures 

trading in India has increased phenomenally in recent years, its ability to provide instruments of risk management has not grown 

correspondingly, and has in fact been quite poor.”

35. See the “Factsheet” downloadable from the S&P GSCI website at: http://www.standardandpoors.com/indices/sp-gsci/en/

us/?indexId=spgscirg--usd----sp------.

36. F.S. Rose, “Futures Markets, Portfolio Diversification and Food Prices”, (June 2010) FAO, Food Outlook, 52 – 56. A particularly 

important paper in this regard was G. Gorton & K. G. Rouwenhorst, “Fact and Fantasies about Commodity Futures”, (2004) NBER 

Working Papers 10595: arguing that the returns from investment portfolios based on commodities display were negatively correlated to 

the returns from stocks and bonds, thus making them suitable for diversifying investments.

37. Kaufman, supra note 23, 30.

38. The CFTC defines “backwardation” as being the “(M)arket situation in which futures prices are progressively lower in the distant 

delivery months.” See the CFTC’s glossary at: http://cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary_b.

html#backwardation.

39. The CFTC defines “contango” as being the “market situation in which prices in succeeding delivery months are progressively higher 

than in the nearest delivery month.” See the CFTC’s glossary at: http://cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/

glossary_co.html.

40. Wahl, supra note 16, 12.

41. M.W. Masters & A.K. White, “How Institutional Investors Are Driving Up Food and Energy Prices” (July 31, 2008), 10. Available at: 

http://accidentalhuntbrothers.com/index.php?s=%22How+institutional+investors+are+driving+up+food+and+energy+prices%22.

42. See Food and Energy Crisis: Time to Rethink Development Policy, South Centre, (2008) Geneva.
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43. OTC derivatives are those which are not traded on exchanges, but purely as bilateral contracts between private parties. For instance, 

contracts which are structures in a unique or particularly complicated fashion tend to be traded OTC. As a result, they can be completely 

hidden from outside view, and therefore unregulated.

44. Mittal, supra note 6, 21.

45. In early 2008, 85% to 90% of institutional investors seeking to invest in commodities did so by entering into OTC swaps with commodity 

index fund managers at Wall Street Banks: G. Epstein, “Commodities: Who’s Behind the Boom?” (31 March 2008) Barrons.

46. Masters & White, supra note 41, 9.

47. T. Kerckhoffs, R. van Os, M. Vander Stichele, “Financing Food: Financialisation and Financial Actors in Agriculture Commodity Markets” 

(April 2010) SOMO paper, 7. UNCTAD, The Global Economic Crisis: systemic failures and multilateral remedies (New York and Geneva, 

2009),.

48. Bank for International Settlements, “Semiannual OTC Derivatives statistics at end-June 2007” (2007); Newman, supra note 34, 8.

49. Kerckhoffs et al, supra note 47, 7. See also D. Domanski and A. Heath, “Financial Investors and Commodity Markets” (2007) BIS 

Quarterly Review, 53 – 68.

50. European Commission, “Is there a Speculative Bubble in Commodity Markets?”, supra note 27, 7. See also Report of the Special 

Rapporteur on the Right to Food, Building resilience: a human rights framework for world food and nutrition security, (20 July 2009) A/

HRC/12/31, (“Building resilience”) ¶ 41, 20 – 21.

51. A study commissioned by PIMCO, the bond giant, had this to say: “... we believe commodities offer an inherent or natural return 

that is not conditioned on skill. Coupling this with the fact that commodities are the basic ingredients that build society, we believe 

commodities are a unique asset class and should be treated as such.” Ibbotson Associates (commissioned by PIMCO), “Strategic Asset 

Allocation and Commodities” (27 March 2006), 4.

52. See supra note 36.

53. D. Kesmodel, L. Etter and A.O. Patrick, “Grain Companies Profits Soar As Global Food Crisis Mounts” (30 April 2008) The Wall Street 

Journal, A1 and A14.

54. Dodd-Frank Wall Street Reform and Consumer Protection Act, (Pub.L. 111-203, H.R. 4173). Signed into law by President B. Obama 

on July 21, 2010.

55. G. Meyer & J. Blas, “Commodity trading houses set to slip under Volcker net” (29 January 2010), Financial Times.

56. S. Nasiripour, “Financial Reform Bill Passes: Banks Keep Derivatives Units, Volcker Rules Softened; House-Senate Conference 

Passes Financial Reform Bill After Marathon Session”, (25 June 2010) Huffington Post. Available at: http://www.huffingtonpost.

com/2010/06/25/financial-reform-bill-pas_n_625191.html. 

57. European Commission, Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties 

and trade repositories, SEC(2010) 1058, SEC(2010) 1059.

58. Id., 8.

59. Id.

60. J. Bunge, “In OTC Battle, CME Sees Success in Commodity Index Swaps” (16 April 2010) Dow Jones Newswires. Available at: http://

www.nasdaq.com/aspx/company-news-story.aspx?storyid=201004161603dowjonesdjonline000741.

61. Whereas the new Section 4a(c) of the Commodities Exchange Act provides that “the (CFTC) shall by rule, regulation, or order establish 

limits on the amount of positions, as appropriate...”, Article 44(4) of the proposed Regulation provides that “A CCP (Central Counterparty) 

shall take into account its overall credit risk exposures to individual obligors in making its investment decision and shall ensure that its 

overall risk exposure to any individual obligor remains within acceptable concentration limits.”

62. S. Amann and A. Jung, “Speculators Rediscover Agricultural Commodities” (29 July 2010) Spiegel: Online. Available at: http://www.

spiegel.de/international/business/0,1518,708765,00.html.

63. Michel Barnier, EU Commissioner for the Internal Market, made repeated statements to this effect. See European Parliament, News, 

(12 January 2010): http://www.europarl.europa.eu/news/expert/infopress_page/008-67167-012-01-03-901-20100112IPR67166-

12-01-2010-2010-false/default_en.htm ; and Francine Lacqua and Helene Fouquet, “EU’s Barnier Pledges Derivatives and Hedge 

Fund Regulations” (04 July 2010) Bloomberg. Available at: http://www.businessweek.com/news/2010-07-04/eu-s-barnier-pledgesderivatives-and-hedge-fund-regulations.html. 

64. B. Hall, “France steps up tougher rules campaign” (31 August 2010) Financial Times.

65. T. Lines, “Regulating Speculation in Food Commodities”, (April 2010) World Development Movement, 3.

66. The CFTC distinguishes between traditional “commercial” traders who hedge against genuine trade risks, and “non-commercial” traders, 

who are primarily interested in speculation or long-term investment.

67. Financial Services Authority and H.M. Treasury, Reforming OTC Derivative Markets: A UK Perspective (2009), ¶9.19.

68. Id. In ¶ 9.21, the paper states that “the majority of commentators have concluded that commodity price movements cannot be solely 

attributed to the activities of any one class of investor and are principally attributable to market wide factors. We agree with these 

conclusions.” This argument fails to take into account the possibility that “one class of investor” can magnify the effects caused by 

others. See also Lines, “Regulating Speculation in Food Commodities”, supra note 65, 2.

69. See Special Rapporteur on the right to food, Crisis into Opportunity, supra note 1, para. 38, 21.

70. The Ethiopia Commodity Exchange has “designed a set of spot contracts that are structured just like futures contracts but with a 100% 

margin for immediate delivery, with currently very little scope for speculation”: Eleni Z. Gabre-Madhin, “Structured Commodity trade 

and Price Volatility: Are Commodity Exchanges the Solution, or the Problem?” (15 June 2010) Presentation to FAO, Rome, 4.

71. Special Rapporteur on the right to food, Crisis into Opportunity, supra note 1, ¶ 38, 21.

72. Id. ¶ 14, 9.

73. Abhijit Sen Committee Report, supra note 34, paras. 11.11 – 11.12.
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74. Id., para. 11.8.

75. Lines, “Regulating Speculation in Food Commodities”, supra note 65, 8: “... some hedge funds, and others, are now taking delivery of 

physicals – and not just in gold.”

76. Report of the Special Rapporteur on the Right to Food, Mission to the World Trade Organisation, (25 June 2008) A/HRC/10/5/Add.2, 

para. 42, 20.

77. The Special Rapporteur has also proposed the establishment of an emergency reserve allowing the World Food Program (WFP) to meet 

urgent humanitarian needs by distributing grain purchased at pre-crisis levels: see Special Rapporteur on the right to food, Crisis into 

Opportunity, supra note 1, para. 39, p. 22.

78. FAO, Management of Wide International Commodity Price Movements – National and International Experiences and Policy Responses

(April 2010) Committee on Commodity Problems, 68th Session, 14 – 16th June 2010, Rome, CCP/04, ¶ 20, 8. See also UNCTAD/

GDS/2009/1, 38; Special Rapporteur on the right to food, Crisis into Opportunity, supra note 1, ¶¶ 39, 21 – 22.

79. STABEX (Système de stabilisation des recettes d’exportation, or “Stabilization of Export Earnings Program”) was introduced in 1975, 

and was open to African, Caribbean and Pacific countries. In order to be eligible for participation, there had to be a drop of 6.5% in 

export revenues from trade with the EU in the sector concerned, measured against a four-year average. Following the Cotonou Agreement 

in 2000, STABEX was replaced by FLEX (Fluctuations in Export Earnings Program), which imposed more onerous eligibility criteria and 

took into account a broader range of economic indicators.

80. The CFF has fallen into disuse since 2000 due to the stringent conditions it imposes for eligibility for financing. On the other hand, 

a number of countries adversely affected by the 2007-8 food crisis resorted to the ESF in order to address balance of payments and 

international reserve position issues. See FAO, Management of Wide International Commodity Price Movements, supra note 78, 8 – 9.

81. See FAO media release, FAO cuts wheat production forecast but considers supplies adequate, (4 August 2010). Available at: http://www.

fao.org/news/story/en/item/44570/icode/.

82. FAO, “Global Cereal Supply and Demand Update” (1 September 2010), FAO/GIEWS Global Watch, 3.

83. J.C. Hull, Options, Futures, and Other Derivatives, (1999) Prentice Hall. Op. cit. G. Dhingra, “An Understanding of Financial Derivatives” 

(2004) The Chartered Accountant 976, 977.

84. R.L. McDonald, Derivatives Markets, (2003) Prentice Hall. Op. cit. Dhingra, supra note 83, 977.

85. European Commission, “Is there a speculative bubble in Commodity Markets”, supra note 27, 3.

86. Dhingra, supra note 83, 977.

87. FAO, “Price surges in food markets: How should organized futures markets be regulated?” Policy Brief No. 9, Economic and Social 

Perspectives (June 2010), 1.
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Acknowledgments

The Special Rapporteur acknowledges the help of Aravind Ganesh in preparing this briefing note. In addition, 

he would like to thank David Frenk, Jayati Ghosh, Tom Lines, George Rapsomanikis, Steve Suppan, and Eric 

Tollens for their helpful comments upon earlier drafts of this note.

Olivier De Schutter was appointed the UN Special Rapporteur on the 

right to food in March 2008 by the United Nations Human Rights 

Council. He is independent from any government or organization, and he 

reports to the Human Rights Council and to the UN General Assembly.

All reports are available on http://www2.ohchr.org/english/issues/food/

annual.htm. See http://www.srfood.org for a thematic classification 

of all reports and statements of the Special Rapporteur. The Special 

Rapporteur can be contacted on srfood@ohchr.org