2.1 Introduction

As food prices spiked up to 28 percent during the first few months of the Russian invasion of Ukraine, urgent efforts to bring food prices down commenced.[17] This resulted in the Black Sea Grain Initiative, a partial reopening of Ukrainian ports, making the export of wheat stocks partially feasible again to ease global supply shortages.[18] The sudden price hikes echoed the dramatic volatility that food prices experienced during the 2007-2008 and 2010-2012 world food price crises.[19] Following decades of steadily declining food prices, these crises showed how varying structural and immediate causes triggered episodes of high price volatility following a similar pattern. As noted by the UN Special Rapporteur on the Right to Food: ‘The shortfall in global exports caused by the invasion amounted to around 7m tonnes – less than 1% of the global crop.… What explains that price is the effect of the speculation: the financial markets, the hedge funds, etc.… It didn’t reflect real world supply and demand, real world readjustment to find new supply routes, real world concerns – it reflected the needs, desires and function of the financial market.’

This chapter provides an exploration of price dynamics on international food markets. It traces how a changing market system moved from a trend of stable and falling global food prices into one of increasing food price volatility. It argues that the way food market systems are currently structured is geared towards highly liquid, efficient and at times profitable markets but not necessarily towards human needs such as reliable affordable food stocks. This poses risks especially to least developed countries (LDCs) and FCAS, given their lower capacity to cover sudden price shocks, as well as their less developed domestic supply chains and domestic agricultural finance systems. This chapter thus briefly traces historical change in the global food market system, explores the financialisation of commodity markets and, finally, zooms in on the way these changes affect food security, especially in fragile and conflict affected states.

2.2 From a centralised imperial system to free trade

Food systems are in essence solutions to an age-old distribution problem of moving various kinds of food staples from a large number of individual producers to an even more vast amount of individual consumers. While the start and end points have remained relatively constant, the methods and actors involved in the intermediary steps have shifted dramatically over time. These shifting structures have reflected different political economic power relations between actors and territories, and hence they reflect shifts in the place where profits, costs and risks are allocated. Understanding these shifts gives a better insight into the role played by a variety of actors involved in the wheat trade up until today and hence the positions of FCAS in this market.

From a historical perspective, international foods systems were largely colonial in character until roughly the 1930s. Relations were geared towards moving various kinds of crops from (former) colonial territories towards more industrialised European states.[20] This system subsequently started to shift away from European colonial powers positioned as the central players to a wider range of nation-state actors predominating by the 1950s. International trade largely centred around national wheat boards, which bought and sold stocks for entire states.[21] Following the changing geopolitical dynamics of the cold war and decolonisation, the colonial system reorganised. Newly independent countries were integrated into a new division of labour through transnational value chains, while LDCs were tied to their geopolitical alliances through access to food exports from their political patrons (especially in the case of the USA).[22]

As a result of these shifts, a more pluralistic global market for food stocks gradually emerged, whose complexity and opacity created space for international traders to emerge at the expense of the position of national wheat boards. This new group of actors came to prominence initially in the 1972 great grain robbery, when Russia bought approximately 30 percent of the US grain harvest to cover for domestic shortfalls in Russia. As Russia struck sizeable deals to import wheat with several of the major international traders, none were aware of the total volume and the scarcity this would create on global markets. As a consequence, the scramble by traders to buy stocks to honour their commitments effectively turned the Russian production shortfall into a global price shock, with prices rising up to 60 percent and tripling the next year. While these shortfalls marked an initial signal of the risks posed by the newly emerging market structure, some traders were able offset their losses in the grain trade through speculation on future grain prices, thus also marking the onset of speculation on food prices.[23]

Despite the price shocks in the early 1970s, the subsequent ‘green revolution,’ starting from the 1980s, again reshaped relations. New production techniques, agricultural subsidies in developed countries, as well as the emergence of a range of countries (especially in South America and Asia) as major food exporters drastically increased the global availability of various food stocks. As a consequence, real prices for most stocks declined and remained stable at low levels.[24] For many LDCs, especially in the Middle East and Africa, low and stable international food prices made it unattractive to invest in domestic production, leading instead to a shift towards imported food stocks.[25] From the perspective of international development actors, investments in LDCs domestic food systems similarly made limited sense, given the availability of cheap imports as a less complicated solution to hunger.[26]

This period also witnessed a shift of responsibilities from public to private actors. For many LDCs, organisations such as national grain boards remained important instruments to manage imports, often supplying an inefficient but predictable government controlled (and often subsidised) distribution system.[27] Yet, international trends towards the liberalisation, globalisation and commodification of the international food system positioned private actors such as traders as the main actors (over state-based actors) internationally. While these new market structures may have contributed to more efficient international markets providing low priced goods, they raised the risks for smaller import-dependent states, as prices became more volatile and these states’ bargaining power vis-à-vis an increasingly oligopolistic market was reduced (see below).[28]

While food markets changed, so did demand in many LDCs. Not only did total demand for various food stocks grow as populations gradually grew, in many states diets changed as well. Factors such as increasing incomes led to a shift towards wheat consumption rather than a wider range of other wheats. Similarly, increasing urbanisation placed especially many men outside of family living situations, leading to an increase in bread consumption in order to avoid the more time-consuming preparations required by many other wheats (e.g., sorghum, teff). Yet while demand for especially wheats increased in many LDCs, the persistently stable and low prices on the international market faded into memory. With increasing weather disturbances as climate change advances and more frequent supply chain disruptions as geopolitical tensions rise, international markets are increasingly characterised by disruption rather than stability. Additionally, such disruptions are leading to increasingly large price shocks due to changing market dynamics discussed in the subsequent chapter.[29] This leaves LDCs in particular in a weak position, given a substantial reliance on imported stocks and a limited capacity to absorb shocks through either domestic stocks or financial reserves.

2.3 From reliability and affordability to profitable trade

The increasing integration of LDCs into the global food market, as well as somewhat related improvements in domestic distribution systems (e.g., infrastructure and regulation) have significantly reduced hunger. Localised price volatility due to regional inaccessibility and localised price fixing or speculation have reduced, as local markets have become more closely connected to international markets.[30] Through their connection to the larger international market, even small national markets benefit from the increasingly efficient production driven by commercialisation and more efficient price finding methods (e.g., through the use of financial instruments to cover risk) that are available to sufficiently large and well capitalised markets.[31] Yet, while shortages associated with poorly functioning local markets may have eased, globally integrated food prices are presenting new threats. Price spikes on the global market may be triggered by (perceived) supply disruptions, and the size and impact of these disruptions on global prices is increasingly a factor in the role of financial markets in international commodities trade.[32]

As markets liberalised, commodity traders’ earning model shifted from overcoming market failures by moving physical stocks from places of abundance to places with shortages into a role increasingly focussed on leveraging financial instruments capable of generating earnings by taking financial positions on market failures.[33] This shift was initiated as new financial products to reduce risk (and thereby increase trade) became available to commercial actors in the production chain. Financial instruments such as futures had been available for producers for a long time to allow them to cover for production risks and raise capital during the planting season. Yet, the extension of the usage of futures and related instruments (e.g., derivatives and options) to actors unrelated to the physical production, distribution or sales of agricultural goods opened a whole new market for traders and speculators.[34] The availability of these financial instruments opened up a new area of profit besides the slow transport of physical goods from producer towards consumer, as financial positions speculating on changing food stock prices could now be bought and sold without ever needing to handle the physical goods. This dramatically raised the importance of collecting and understanding vast amounts of market information, as well as the ability to quickly raise large amounts of funds to finance deals to capitalise on perceived disturbances. The large traders operating many steps in most agricultural value chains across the world were able to leverage their information position especially well.[35] This allowed them to set up some of the largest hedge funds in the world, and the bets they placed on expected over- and under-supply became the key drivers of their profitability.[36] In many cases this made betting on market failures more important than moving goods to compensate for them. The record profits achieved during the Russian invasion of Ukraine in 2022 provide a prime example.[37] In other more exceptional cases where traders established very strong market positions, they stimulated market failures by advocating for protectionist measures in order to sell stocks elsewhere at elevated prices driven by fears of global supply shortages. One example of this is the advocacy for a Russian grain export ban, which would have served to sell stocks in the Middle East at higher prices.[38]

The financialisation of food markets also allowed for an influx of various of actors into food speculation, such as pension funds, banks and automated traders. In many cases, these actors are attempting to diversify their investment portfolio with commodities (especially grain and gold) to hedge against inflation.[39] Their entry into the sector influences its structure. Firstly, commodity portfolios established by several actors are repackaged into exchange traded funds and sold on. The trade in these products effectively couples supply and demand for many commodities, thus translating market dynamics from one commodity to others. Most notably, this reinforces the connection between oil prices and grain prices, which is felt doubly in LDCs. Oil prices already heavily influence the price of fertiliser and also affect the costs of wheat distribution.[40] This raises the price volatility of wheats substantially.

Secondly, it should be noted that the highly oligopolistic nature of commodities trade and its poor market transparency inhibits its functioning. The four biggest traders (ADM, Bunge, Cargill and [Louis] Dreyfus, collectively known as the ABCDs) have captured approximately 75 percent to 90 percent of the global wheat market and keep data on trade activities obscured in order to their give own trading divisions an edge.[41] This means that most of the non-ABCD investors have poor visibility on market fundamentals. This reduces the ability of non-ABCD traders to trade based on actual demand-supply dynamics and relegates them to speculating based on the sentiment of other investors or minor price fluctuations. Such speculation, focussed on the behaviour of other investors, amplifies price swings significantly beyond what is justified based on demand and supply dynamics, thus aggravating price volatility.[42]

Given the largely unregulated market dynamics, states’ ability to insulate themselves from such fluctuations has decreased. Due to the market’s intransparency, no actor (besides the major commodity traders) has a good view of current market dynamics and thus of the extent to which sufficient stocks are available (and where).[43] This makes proactive actions by state actors to curb shortages difficult. Worse yet, policy measures such as export bans may frequently create or exacerbate (perceived) risks stemming from the commodities sector because it translates potential production shortages in a producing country into global price spikes, as importing nations fearing shortages may start establishing stocks in response.[44] Furthermore, while stocks kept in (over)producing countries may be highly effective at curbing speculation (as they can be released when prices spike), national surpluses and stockpiling programs were largely abolished in western countries during the 1990s. Finally, attempts have been made to impose position limits (maximum amounts of commodities under contract) on speculative instruments on key goods in several commodity markets. Yet, in most cases, such limiting measures in the USA and EU have failed to provide hard limits to speculation or have been abolished following lobbying efforts from market actors.[45] As a consequence, the commodities market for wheats remains largely unregulated, prompting even countries with sizeable financial reserves to take measures to cover price risks. Examples include state investments in major commodity traders, such as China Oil and Foodstuffs Corporation, Louis Dreyfus (by the United Arab Emirates) and Olam Agri (by Saudi Arabia).[46] Unfortunately, such policy options are rarely available to LDCs.

2.4 Fragile states vis-à-vis international markets

Changing dynamics in international markets are leading to increasingly volatile wheat prices. While such dynamics affect all actors in the market, they have an especially pronounced impact on fragile states. On the one hand, fragile states are somewhat insulated from the unregulated oligopolistic tendencies prevalent in international markets. The frequently low disposable incomes in FCAS makes their domestic markets too small to attract the attention of the major traders that may be able to influence global commodity prices. Instead, fragile states frequently rely on a much smaller subset of specialty traders that are able to tackle the bureaucratic and logistic specificities required to supply a niche market.[47] Considering the small volumes sold in these markets, even if they offer margins higher margins than larger markets they do not generate profits that are material to the bottom line of any of the major traders.[48]

While fragile states are thus somewhat insulated from international competitive dynamics, the volatility of international prices does significantly impact FCAS in a number of ways. Firstly, it should be noted that most fragile states have relatively limited financial reserves. This severely limits the ability of national agencies and wheat boards to influence domestic prices. A policy aimed at capping consumer prices through subsidies is often prohibitively expensive. Meanwhile, policies establishing price caps at consumer level without associated subsidies are frequently unenforceable as such measures may severely restrict available supply when only a few suppliers can cover costs while others cease production at these price levels.[49] Such supply restrictions will in turn give rise to an emerging informal trade at elevated prices to address remaining market demand.

On the supply side, if wheat boards have a smaller volume of working capital, which severely limits their ability to find larger volumes to reduce prices, as they cannot source efficiently. With low volume tenders, only shipments sourced from locations close by may be competitive, as transport costs start to drive up the prices per tonne for small shipments.[50] This reduction of potential sourcing locations also limits the amount of traders willing and able to respond to the tender, thus reducing an importing agency’s buying power. Furthermore, less working capital limits the amount of stocks the agency is able to maintain, and hence limits the agency’s ability to defer purchases while awaiting lower prices. It thus limits their ability to build up stocks to cover periods featuring elevated prices.[51]

Thirdly, many fragile countries are plagued by a weak balance of payments. Frequent export disruptions due to insecurity and conflict may contrast starkly with stable and continued expenses related to state debt and food and fuel imports. As a result, foreign currency reserves at times dwindle. While this obviously limits the ability to import wheats, it also limits the ability to import the inputs necessary for domestic production (notably fertilisers and pesticides).[52] As such, foreign exchange shortages risk translating high food prices into reduced domestic production during subsequent harvesting seasons. The imperative to shore up foreign exchange reserves, not only to finance inputs but also for its wider economic function, in turn creates incentives for switching agricultural land from domestically eaten crops to exportable crops. Such dynamics may especially affect rural populations relying on domestically produced staples in their diet. Furthermore, as attempts to bolster either production or foreign exchange reserves become more pronounced, land policies may be significantly liberalised, leading to concentration amongst either domestic or foreign investors speculating on future value increases of agricultural lands.[53]

Finally, further distortions may occur during transport as insecurity rises. Transport costs tend to rise as the number of check points and the fees required to pass along a route rise, and as certain roads become completely inaccessible. Detours to avoid dangerous areas add significant additional costs. This may compound price rises, with rising energy costs becoming a bigger component of final prices as detours and hence gas costs as a share of consumer prices increases. Especially as energy prices tend to correlate with rising fertiliser costs and hence to some extent with international food prices, energy price rises may translate into consumer prices rises rather heavily.

2.5 Conclusion

This chapter explored the development of international food trade regimes, the impact of the financialisation of the commodity trade and the position of fragile states vis-à-vis international markets. It highlighted how many states switched to a reliance on internationally traded wheats as an efficient way to source food, while low international prices became increasingly volatile. Food systems thus shifted from a design focussing on reliable and affordable food supply to a market dynamic focussed around competition over maximising earnings for market participants. It also explored how power shifted in the wheat markets from national institutions (e.g., wheat boards) to commodity traders and financial institutions seeking to speculate on price changes. While the increasing access to financial instruments may contribute to efficient price-finding and smooth access to finance for productive actors in the value chain, the increasing financialisation also introduces trading and speculation considerations that move power from productive actors towards investors. Finally, this chapter showed how fragile states are impacted by international price dynamics and to what extent they are insulated from global competitive dynamics. By exploring the incentives, power structures and trading relations affecting the position of fragile states (and their consumers) in the international market, this chapter highlights the importance of the structure of the wheat supply chain for food security. The impact of the organisation of both international supply chains and their relation to national trade on food security is likely to considerably outstrip the impact that can be achieved through food aid or development aid aimed at improving farm yields in many FCAS. The organisation of domestic wheat value chains may thus very well be one of the most impactful levers when it comes to food security in FCAS. This is the topic under discussion in the next chapter.