Government intervention may be needed to burst the huge bubble that has developed in the price of commodities such as food staples and oil, a United Nations report said.
Prices have rocketed in response to dysfunctional commodities markets, according to the report, which also disputes the view of many senior economists and central bankers that commodity prices have jumped as a result of a surge in demand.
“The changing role of commodity markets, which are turning into financial markets, has enormous repercussions for the economy,” said Heiner Flassbeck, director, UN conference on trade and development (Unctad).
Investors are encouraged to behave like a herd, says the report, with few incentives to arbitrage or bet against the tide of rising prices.
Without checks and balances in the system, investors create price bubbles that put many basic foodstuffs out of the reach of millions in the developing world.
Oil may be as much as 20% over valued while maize, the staple food of many developing world economies, is subject to wild swings in price.
In April, the world development movement blamed Barclays Capital (BarCap), for driving up prices. BarCap is the UK’s biggest player in food commodity trading. BarCap has pioneered the creation of derivatives that allow pension funds and other investors traditionally barred from commodities exchanges to bet on food prices. Nearly $270 billion is invested in derivatives that follow commodity prices, up from $90 billionn in 2005, according to Unctad.
A separate report by the UN special rapporteur on the right to food, Olivier De Schutter, argued that the appetite for investments in commodities was even higher. He found that commodity index funds rose from $13billion in 2003 to $317 billion by 2008.