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G20 Update Newsletter - September 2010 Issue


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G20 Update Newsletter published by Heinrich Böll Foundation

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G20 Update Newsletter - September 2010 Issue

  1. 1. G20UPDATE E-NEWSLETTER September 2010 CC-License by hz536n ! Topics covered in this Update Preparing for Seoul Must reads G20 & Food Security - Opinion - Backgrounder - and getting ready for A selection of missing the big Commodity Commodity France documents, speeches picture? Speculation Speculation A preview of the and papers that A short critique on the A comment by David Glossary of Terms and preparations of the provide more in-debt role the G20 plays in Frenk from Better a short explanation of Seoul summit and a information the area of food Markets on the G20 the most important glance at France’s G20 Page 3 security and commodity actors in the presidency in 2011 Page 4 speculation commodity market Page 2 Page 5-6 Page 7 1
  2. 2. G20UPDATE These developments, and the Preparing for Seoul and CC-License by G20 Seoul Summit seriousness with which the Korean getting ready for France G20 committee is tackling the preparatory meetings shows that they Broadening of G20 are determined to host a successful agenda is continuing summit and are ready to create A summary report by Sandro Gianella expectations that they believe will be met. At the same time, pundits are The G20 governments and sherpas discussing the possibility of a divide are currently in the process of preparing not between developed and developing the summit in Seoul in November. A countries, but along geographical lines. series of meetings on both ministerial- While these fears have yet to be levels (finance and central bank deputies substantiated, the continued widening meeting) and among the development of the G20s agenda and the uneven working group that was initiated in recovery from the financial crisis will Toronto, indicated that the G20 is not make it easy to reach conclusions. certain of its role and is therefore Simultaneously, the French creating high expectations for government under president Sarkozy has stepped up and outlined its ideas their next summit. In a recent for the G20, once they take over the presentation the Korean presidential committee for the G20 summit outlined presidency from Korea right after the Seoul Summit. In a yearly high-profile by saying: the agenda for the event, making clear speech to ambassadors, he argued that that they saw the Toronto Summit as rather then finishing what is left from “Why should we only regulate derivative providing a basket of policy options whereas Seoul will be the place for the Korean summit, France will show markets in the financial sphere? Extending making concrete policy “action and ambition” trying to regulations to raw materials and agricultural recommendations. The main points in “shake up global governance, markets is possible and desirable. That way we the agenda are: reform of notably by setting up a G20 will limit speculation.” (WSJ - Sarkozy secretariat with a role in outlines priorities for French G-20 leadership) international financial institutions, financial regulatory development and climate In addition, he said the G-20 needs reform, and global financial measures.” In addition, three main topics are on the top of the agenda: the to review the transparency of safety nets (to better deal with agricultural markets and study stocking volatilities in global capital flows) reform of the international monetary policies, as well as the creation of system and stabilization of exchange and development. The Korean insurance instruments by international government believes, that development rates, the regulation of raw material financial institutions to allow importing prices and excessive commodity falls in line with the G20s broad countries to shield themselves against speculation and the reform of world mandate and expertise. However, it price volatility. France’s economy, governance. International media is takes a rather narrow view of energy and agriculture ministers sent a skeptical of the scope for spectacular development, with recommendations letter to three European commissioners, success during the French G20 focusing mainly on growth, investment arguing that “at a time when presidency, given the opposition in other in infrastructure, trade and human commodity markets are more and more capitals to some of their most cherished resource development (the next edition financial, the European regulation of plans, such as exchange rate reform or a of the newsletter will take a detailed commodity derivatives markets appear proposed international tax on financial look at the development agenda of the insufficient to us.” transactions. In addition, the ambitious G20). In short, both the Korean and the agenda is also viewed in regards to the French presidency of the G20 confirm upcoming presidential election in the thesis that the group is trying to gain France in 2012. legitimacy in the sphere of global CC-License by JanetandPhil This newsletter governance by taking on issues such as will take a closer development and food security in look at a particular point in addition to their original target of France’s G20 financial and economic governance. Besides, it is becoming clear that the presidency: approach of the G20 in these issues is commodity rather conservative and most of the speculation and times purely growth oriented. This calls food security. The for additional pressure by civil society strengthening of groups to push their principles and the oversight of agenda on the table and hold national global commodity governments accountable for the markets was raised by Sarkozy, positions and decisions they take at the G20 level. 2
  3. 3. G20UPDATE G20 MUST READS The great hunger lottery Financing Food New rules to curb Wall - How banking - Financialization and Street’s influence over speculation causes Financial Actors in food and farming food crises Agriculture Commodity by the Institute for by World Development Markets Agriculture and Trade Movement by SOMO Policy (IATP) By Tim Jones By Thijs Kerckhoffs, Roos van Os and Link: Myriam Vander Stichele press.cfm?refid=107616 Link: speculation/great-hunger-lottery Link: en/Publication_3471/view This comment on the recent Wall Street reform bill argues that the new The World Development law will severely restrict excessive Movement (WDM) describes the subject Financing Food focuses on how speculation on agricultural commodity of their report as “the highest stakes, derivative markets work and on futures markets. Commodity expert riskiest economic behavior ever devised, speculation in food and agricultural Steve Suppan argues that “this married to the most fundamental basic products. This study demonstrates how landmark bill is a first step toward need of humankind.” Derivatives the futures market for agricultural trading has been one of the most products, in particular, has changed and preventing the excessive speculation by big Wall Street banks that has created lucrative parts of the financial industry, is being disrupted by new speculators, enormous price volatility in agriculture but it is the increasingly complex, growing index funds and commodities funds. This can have an influence on and energy markets and is an important opaque and disconnected nature of food prices, which can rise as a result, win for farmers and rural communities these and similar products that ultimately triggered the collapse of the making food too expensive for the poor whose economic futures are so tightly linked to agriculture and energy.” banks and the worst financial crisis in inhabitants of developing countries. This landmark bill is going to play a human history. While betting on the The study also shows how a crucial role in the discussion of the G20 value of sub-prime mortgages number of large banks and investment undoubtedly leads to disastrous banks, such as Goldman Sachs, Bank of members and it is expected that the consequences, there is another area America and Deutsche Bank, control a French presidency will most likely have a close look at how the Obama where the speculative behavior of the wide range of functions in the world’s largest banks and hedge funds derivatives trade and are a driving force administration dealt with the issue of represents a threat to the very survival behind the financial speculation. These excessive commodity speculation. of people: food commodities. banks made huge profits and paid huge Although the bill has yet to be In this report, the WDM has bonuses in 2009, partly as a result of the implemented, it makes clear that it is possible and imperative to combine the compiled extensive evidence trade in derivatives, of which food discussion on food security with the establishing the role of food commodity derivatives formed a part. increasing financialization of derivatives in destabilizing and driving SOMO closes the report with up food prices around the world. several proposals for reforms within the commodity speculation in order to create coherent and effective policies. Furthermore, it shows how this was financial markets for agricultural The bill requires the Commodity fueled by the behavior of financial products, in order to prevent excessive Futures Trading Commission (CFTC) to speculators, and describes the terrible speculation. Up to now, the derivatives immediate impacts on vulnerable trade has remained largely unregulated. set per-commodity limits across all markets on the number of derivatives families around the world, as well as the Legislation is being drawn up in the US, contracts that can be controlled by any long term damage to the fight against the subject has long been on the agenda one entity and its affiliates during a global poverty. The report further for the G-20, and the EU is preparing trading contract period. In addition, it describes how the current situation new laws. also requires that most derivatives came to pass, the risks of another presently traded over the counter will be speculation induced food crisis, and SOMO’s website has many more traded on public and regulated what specifically can be done by interesting articles and documents on exchanges. The report concludes by policymakers in the US and the EU to the subject of food and agriculture. arguing that greater transparency in the tackle the problem. Here is the link to the respective page: U.S. will also benefit many developing At its heart, it carries a very food-agriculture/food-agriculture countries, which will benefit from straightforward message: allowing greater price predictability and stability gambling on hunger in financial as they forward contract sales. markets is dangerous, immoral and indefensible. Follow IATP on Twitter: 3
  4. 4. G20UPDATE G20 & Food Security Missing the big picture? By Ute Straub & Sandro Gianella The outbreak of the financial sustainable measures need a more wide- demand, as argued in a recent report of crisis in 2008 has led to a remarkable ranging definition of food security. The the United Nations Conference on rebirth of the Group of 20, turning the discussion is stuck in intellectual silos Trade and Development. Since the club into the self-declared premier instead of tackling the topic of food introduction of so-called commodity forum for global economic security in synchronization with the rest index fonds by institutional investors coordination. At the same time, the of the economic agenda of the G20 and such as Goldman Sachs, traders are world was shocked by a global food in order to find a development-friendly allowed to invest in the price of basic crisis with food-prices skyrocketing at trade reform and a way to curb foodstuffs. The number of derivatives times up to 100 (corn) or 140 percent excessive speculation on commodity and future contracts have shot up. In (wheat). These drastic changes have had markets. addition, many of these financial tremendous consequences in developing Moreover, the initiative of the instruments are traded over the counter, countries, where millions were no longer G20 is not integrated into other and are therefore neither transparent able to buy their daily food. In some programs of international “food nor regulated. The passage of the countries like Haiti, the Philippines or security governance” but instead creates Dodd-Frank Wall Street reform bill in Egypt this even lead to wide-spread parallel structures detached from these the United States has shown, that it is riots. existing strategies. For example, the possible to combine the discussion on Consequently, the G8 and the “Committee on World Food food security and the reform of G20 too, could no longer look away and Security” (CFS) under the auspices of financial markets in an effective and included food security on their agenda, the FAO has been applauded as coherent manner. (more on the bill in most prominently at the 2009 G8 successfully integrating groups affected the opinion piece on the next page) summit in L’Aquila, Italy. The heads of by food insecurity into the decision- The G20 does have the state agreed to raise a total of 20 billion making process. In how far this newly opportunity to push for global financial US dollars for the fight against hunger. established body will become a serious reforms that would lead to a fairer and Moreover, in the final communique of actor in part depends on its financial more transparent way of trading the G20 Pittsburgh Summit, they possibilities and the resulting political commodities. In short, the G20 should committed to continuously invest in the authority. Rather than bypassing the realize that food security is a complex promotion of food security. The World CFS completely, the G20 should give it problem which is dependent on the Bank was commissioned to set up a trust the power to coordinate the newly support and cooperation of both civil fund for these investments and in April available funds for food security in order society and local actors. As the premier 2010 the so-called Global Agriculture to take advantage of the democratic forum of discussion for global economic and Food Security Program (GAFSP) and participative structure of the cooperation it does have a role to play was started. Responding to committee. This is more likely to result in solving the recurring food crises, but recommendations from the G20, it in a fair distribution of the funds in the until now it has only attempted to solve focuses mostly on the increase of interest of the affected populace. part of the puzzle. It remains to be seen agricultural productivity and the What’s more, the increasing whether the G20 will finally be able to improvement of access to new financialization of commodity markets draw conclusions not only in regards to technologies in developing countries. has led to more severe price-fluctuations the financial-, but also the food crisis The fact that OECD countries are now that are not directly related to the and consequently increase the paying attention to the agricultural market fundamentals of supply and coherence of their recommendations. sector is to be welcomed. However, the way in which this problem is being dealt with leads to several problems. Putting increasing agricultural production in the spotlight means that the G20 is missing a big part of the picture. Aspects such as the relations in the international trade system or the vulnerability of developing countries to price fluctuations in commodity markets are left out of the debate. The recent rise in wheat-prices after the fires in Russia - even though experts agreed that global supply is sufficient - shows the problematic role that speculators play on agricultural commodity markets. CC-License by Subu-yan The lack of coherence in the policies of the G20 is especially regrettable because 4
  5. 5. Opinion G20UPDATE Commodity Speculation By David Frenk “The G20 has been slow out of financial crisis, stabilizing the blocks, despite the fact that volatile commodity markets there are few issues as urgent for Note to the reader: If you are not as familiar with the specifics and the is one of the most important its member countries as vocabulary of commodity markets have a preconditions for economic repairing commodity markets.” look at the backgrounder on page seven recovery. before you continue reading (all the words the U.S. regulates all commodities That is why the French in italic are explained there). futures (and now, with the passage administration has moved to push of the Dodd Frank reform bill, all commodities regulation towards other commodities derivatives too). the top of the G20 agenda. A week The passage of the Dodd- Such a proposal was previously ago, President Sarkozy announced Frank Wall Street Reform and championed by French Finance that regulating commodity derivatives Consumer Protection Act in the Minister Christine Lagarde. would be one of the priorities of United States paved the way for Currently, EC commodity market France's year-long presidency of real change in global commodities rules are loosely enforced by the G20, which commences in markets. At the time of its passage, national authorities, who are often November. This was followed by a Chairman Dodd called for inconsistent and sometimes even letter from France’s Economics, coordinated international effort indifferent about implementation Energy and Agriculture Ministers, towards rescuing food and energy and enforcement. As well as sent to three European markets from their current plight. proposing a more centralized, and commissioners on August 27th, However, the G20 has been slow therefore consistent, approach to which stressed the inadequacy of out of the blocks, despite the fact regulation, the letter also raises the current regulatory structure. that there are few issues as urgent other possibilities. These include The letter called for coordinated for its member countries as the creation of U.S.-style position action across the EU, and sketched repairing commodity markets. limits to curb excessive out some possible strategies for These markets determine the speculation, and various measures reform. allocation of the essential raw to improve transparency. These strategies include the materials of society: food to keep establishment of a European us alive, and fuel to power our All this begs the question: what equivalent to the Commodity Futures industries and homes. In a world exactly is the problem that the G20 Trading Commission (CFTC), which ravaged by the effects of a global is trying to solve by reforming in regulation of commodities markets? CC-License by Sifu Renka Really, there are two separate problems: manipulation, which can potentially show up in any market, and excessive speculation, which is specific to commodities. Manipulation is a deliberate abuse of market power to influence prices. It occurs when a small group of market participants gains enough power to control prices for a period of time, and uses this power to their own advantage, at the expense of other participants. A notable example came last month, when Anthony Ward of Armajaro Asset Management LLP purchased enough cocoa on the London International Financial Futures and Options Exchange (Liffe) to make 5.3 billion chocolate bars, pushing up cocoa prices 5% in one 5
  6. 6. Opinion G20UPDATE Commodity speculation - continued day. This was enough to prompt actual in the gaps where a consumer is users of cocoa to write to NYSE Liffe, temporarily unable to find a producer the holding company of the Liffe to trade with, or vice versa. David Frenk exchange, as well as the UK’s Financial However, in the absence of Services Authority demanding the adequate regulation, speculation (risk- David Frenk is the executive creation of position limits to curb such seeking) by financial traders can come director of Better Markets. activities. to dominate hedging (risk-avoidance) by He studied Philosophy, Excessive speculation is a less commercial end-users. In such Politics and Economics (PPE) at Oxford University, well-understood phenomenon. scenarios, speculation tends to before completing his However, it is potentially far more exacerbate price volatility rather than graduate studies in dangerous. Here, the price distortions smooth it. This harms businesses and Philosophy at New York are generally not deliberately created. households as the cost of their inputs University. At both Whereas manipulation refers to an becomes unpredictable and institutions, he was the intentional act of sabotage perpetrated unaffordable. This volatility causes recipient of various by some individual or small group, unemployment in developed countries, academic awards and excessive speculation is a condition of and starvation in emerging nations. scholarships. Prior to joining the market that may arise even when Excessive speculation is greatly Better Markets, David every individual participant is acting in facilitated by the existence of worked in both the private and public sectors on a good faith. unregulated over-the-counter (OTC) broad range of business and To understand the problem of derivatives markets. In these markets, there policy issues. In 2005, he excessive speculation, it is necessary to is zero transparency, as financial acted as a consultant to the speculators use swaps and other Rwandan government on instruments with no disclosure economic strategy and “So far, the G20 has committed requirements to bypass position limits. policy. In 2006 and 2007, he only to improving the over-the- The impact of this speculation is then worked at OECD’s Center passed on to regulated futures for Education Research and counter derivatives market rather Innovation as a consultant exchanges by the large banks who act as than radically restructuring it, as on education policy across dealers in the OTC markets when they has been the case in the US. In Europe. From 2007-9, David hedge their exposure on exchanges. part, this is a product of mass Finally, the volatility this creates in operated as a full-time lobbying by financial institutions.” researcher at Masters futures markets is passed on to Capital Research, consumers and producers, both when coordinating theoretical and take a step back and consider the they trade futures, and when they empirical analysis of purpose of commodities markets. actually buy physical product directly, markets. Physical commodities in their natural because the prices of many physical state are prone to uncertainty and risk. commodities are benchmarked against Since joining Better Markets Bad weather like the droughts in Russia futures prices. in 2009, David has can destroy crop yields, while oil spills coordinated a team of The EC is holding a public researchers studying the like the Deepwater Horizon disaster can hearing on commodity function of commodities knock out millions of barrels of oil derivatives reform (covering both markets and capital supply. Therefore, commodity futures exchange-traded derivatives like futures markets. He has met with exchanges exist to enable producers and representatives of the CFTC, and OTC derivatives like swaps) on consumers of these products to manage SEC, FERC, and FSA, as Tuesday September 21st. The G20 their risks. well as members of the plans to hold a public event in late On exchanges like Liffe, ICE United States Senate and December or early January, with a (Intercontinental Exchange) and CME the United States House of follow-up in March of next year. So far, Representatives to discuss (Chicago Mercantile Exchange), producers the G20 has committed only to "improv these topics. He has also and consumers of everything from [ing] the over-the-counter derivatives lectured frequently in the metals to coffee to crude oil can come market" rather than radically United States and his native together to enter into and trade restructuring it, as has been the case in United Kingdom on market contracts for future delivery. For structure and function, and the US. In part, this is a product of example, a farmer could enter into a on appropriate regulatory mass lobbying by financial institutions. grain futures contract with a large baker to frameworks. It is essential that members of civil lock in a certain price for his crop, and David is an expert in financial society speak up at these events. We an airline could use oil futures to protect markets, and has extensive must let the G20 know that in a fair itself from a spike in fuel prices. These training in statistical analysis world lives and livelihoods come before and other formal commercial participants are joined by financial profiteering. mathematical techniques. speculators, who seek to profit by filling 6
  7. 7. G20UPDATE BACKGROUNDER COMMODITY SPECULATION Commodity Markets businesses to plan ahead more easily futures trading strategies that seek to without having to worry about drastic replicate one of the major commodities They are markets where raw or price swings. indices by mechanically following that primary products are exchanged. and index’s methodology. They aim to profit traded on regulated commodities Commodity Index from price movements in commodities exchanges, in which they are bought futures. They are not in the market to and sold in standardized contracts In a commodity index, an investor’s hedge an underlying exposure to money is spread among a number of physical commodities and are not What is a Futures Contract? commodities. For example, if an involved in the production or investor buys $1000 of the S&P/ consumption of actual tangible A futures contract is an agreement Goldman Sachs commodity index, $700 commodities. They are predominantly to buy or sell in the future a specific would be invested in energy futures like institutional investors such as corporate quantity of a commodity at a specific crude oil and natural gas, $140 in and government pension funds, price. Most futures contracts agricultural commodities like wheat, sovereign wealth funds, public and contemplate actual delivery of the corn and soybeans, $80 in industrial private foundations and life insurance commodity can take place to fulfill the metals like aluminum and copper, and companies. contract. However, some futures the rest in livestock and precious metals. contracts require cash settlement in lieu of delivery, and most contracts are Derivative Chicago Mercantile liquidated before the delivery date. An Exchange option on a commodity futures contract A financial instrument, traded on gives the buyer of the option the right to or off an exchange, the price of which is The Chicago Mercantile Exchange convert the option into a futures directly dependent upon the value of (CME) is an American financial and contract. They allow buyers and sellers one or more underlying securities. commodity derivative exchange based of physical commodities to hedge their Derivatives involve the trading of rights in Chicago. It trades several types of prices and to determine the market or obligations based on the underlying financial instruments: interest rates, price of the commodities. product but do not directly transfer that equities, currencies and commodities product. Derivatives can also be used to and has the largest options and futures Who uses Futures and acquire risk, rather than to insure or contracts open interest (number of Options Markets? hedge against risk. Thus, some contracts outstanding) of any futures individuals and institutions will enter exchange in the world. Most of the participants in the into a derivative contract to speculate futures and option markets are on the value of the underlying asset, Commodity Futures Trading commercial or institutional users of the betting that the party seeking insurance Commission commodities they trade. These users, will be wrong about the future value of most of whom are called “hedgers”, the underlying asset. The Commodity Futures Trading want the value of their assets to increase Commission is an independent agency and want to limit, if possible, any loss in of the United States government based value. Hedgers may use the commodity Over-the-counter (OTC) on the Commodity Exchange Act, markets to take a position that will derivatives which prohibits fraudulent conduct in reduce the risk of financial loss in their the trading of futures contracts. In Are contracts that are traded (and assets due to a change in price. Other 1974, Congress amended the Act to privately negotiated) directly between participants are “speculators” who hope create a more comprehensive regulatory two parties, without going through an to profit from changes in the price of framework and created the CFTC. It’s s exchange or other intermediary. The the futures or option contract. OTC derivative market is the largest mission is to protect market users and market for derivatives, and is largely the public from fraud, manipulation, Hedge unregulated with respect to disclosure of and abusive practices related to the sale information between the parties, since of commodity and financial futures and A hedge is a bet in the opposite the market is made up of banks and options. direction from your primary risk. As a other highly sophisticated parties, such farmer wants the price of grain to be as hedge funds. Sources: high, a hedge is any bet (contract) in the - opposite direction, i.e. buying a future - that rises in value if grain prices drop. Index Speculator bankers-betting-food/glossary- That effectively locks in a price for a Index speculators are institutional financial-jargon future sale, which allows farmers and investors engaged in commodities - 7
  8. 8. G20UPDATE G20 Database & E-Mail Group Stay informed Database E-mail Group If you would like to read more on the G20, recent In addition, the Heinrich Böll Foundation is part of an changes in Global Governance and what it means for specific international network of NGOs and policy-analysts, which regions or issues, the G20 Database of the Heinrich Böll have set up a G20-related E-mail Group. Foundation is the right place to go. It is subdivided into the following folders, so you can easily access the analysis and To subscribe, send email to: alternative- information that is of interest to you:   To unsubscribe, send email to: alternative-   Folder Structure of the Database To customize your subscription, go to http:// 1 - Background (but you need to 2 - Summits create a Google account, if you do not have one) 3 - Issues 3.1 - Finance Replies automatically go the whole group. To minimize email traffic, please do only reply to the whole group if necessary. 3.2 - Climate Change There is no moderation. 3.3 - Development 3.4 - Energy 3.5 - Trade 4 - Country Specific The G20 Database is meant as a way for the 5 - Power Dynamics Heinrich Böll Foundation and its partners to share 5.1 - Within the G20 and collect information surrounding the G20 and 5.2 - G20 to non-members related issues. 5.3 - International Organizations 6 - Civil Society In addition, every folder contains both a Word and PDF document with annotations of the documents included in the folder. Impressum So far, regional Heinrich Böll offices in Washington, Mexico City and Johannesburg and international civil society organizations have asked to access it. More Publisher importantly, the database is designed in a way that every Heinrich-Böll- member can add documents himself, which are then instantly Foundation synchronized so that everyone can access it. This is a great Schumannstrasse 8, way to share information and build up institutional capacity. 10117 Berlin T 0049 30 285 34 - 0 If you would like to know more about the Database E or sign up for access please send an Email to Sandro Gianella at To get started right away, here are the 3 easy steps to install the Database on your computer: Editorial Responsibility 1. Install the Programm "Dropbox" from https:// Heike Löschmann Head of Department International Politics 2. Write to Sandro Gianella, who will send you an Email invite to share the G20 Database folder. Assistance 3. Accept the invite and you should be able to access the Sandro Gianella database through a Dropbox icon on your Desktop. 8