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Sarkozy’s war on commodity speculators – is intervention the way to go?

French economy | Sarkozy’s war on commodity speculators – is intervention the way to go? Anthony Harrington

French President Nicolas Sarkozy is probably the leading proponent among supposedly free market politicians, of vigorous state intervention in the markets wherever and whenever things do not seem quite “right” to him. In particular Sarkozy has sought to demonise “commodity speculation”, conjuring up images of sharp suited spivs manipulating the price of agri-commodities such as wheat to the detriment of honest French farmers.

Back in October 2009, speaking at a cheese-making town in the east of France, Sarkozy combined an announcement of a 650 million euro exceptional aid package for struggling French farmers, supplemented by a further one billion euros in cheap loans, with loud declamations against commodity speculators, and promises of action against them. “I will not let French agriculture be swept away by the crisis,” he promised his audience.

Farming matters hugely for any French politician. The industry employs some 770,000 people and French farmers are among the most heavily subsidized farmers in the world, which is why statistically French farmers always appear to be struggling. There is tremendous incentive, with all that subsidy around, if you have any land at all, to turn yourself into a “farmer” irrespective of whether your patch is viable or unviable. The government knows to its cost that by annoying French farmers, it risks motorways blockaded by tractors and
wagon loads of ordure dumped on the government’s doorstep. 

Against this background, the incentives for French politicians to play the “farm” card is huge. Being on the side of French farmers, particularly if your popularity rating is crashing in other areas, is a good way of boosting your image. The fact that history is littered with the catastrophic effects of government attempts to set prices for key commodities seems to have no weight with the French president. Back in 2009, in that same speech, he called on the European Commission to find a way of reigning in futures contracts (derivatives) on commodities and for “proper regulation” to be imposed.  At the end of January 2011 the EC was about to bring out a policy paper on raw materials and commodity markets when the paper was pulled “at the eleventh hour” when officials realized that the paper would run into massive French opposition for not being tough enough.

Now that France has taken over the revolving presidency of the G20, Sarkozy has declared it his mission to ensure that it keeps what he is pleased to term the strong link between commodity speculation and price spikes in key agri-commodities, right at the forefront of G20 and EU thinking, with the aim of forcing through some kind of anti-speculator legislation aimed at commodity markets. As we have already seen, this kind of thing plays extremely well with Sarkozy’s home audience, but serious studies which set out to try to measure the impact of speculation on commodity prices find it very hard to separate out the various factors that drive commodity pricing.

A recent study by the International Monetary Fund pointed to strongly rising demand from emerging nations such as China and India as a key factor pushing agri-commodity prices to record levels. At the same time as demand has been rising, adverse weather conditions – a combination of droughts in some areas and severe flooding in other regions – has severely  impacted wheat and grain crop production, curtailing supply. That some investment managers will put two and two together and divert some funding to investing in agri-futures is thus inevitable. Sarkozy’s grand idea is a financial transactions tax aimed at commodity market transactions that could, in his words, “raise $100 billion a year in aid for the world’s poor countries”. If such a tax were ever to come about, expect it to have profound unintended consequences in the commodities space. Europe is keen, however, to explore proposals to ensure more transparency where particular traders are taking large positions in commodities. There is also talk of capping large trades and giving regulators the power to intervene in large scale speculative positions.

Further reading on commodities and regulation:

Tags: agri-commodities , commodities , French farmers , G20 , regulation , Sarkozy , speculators
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