International food prices

The Government is aware of the effect of high food prices on the poorest people of the world. The Government is working closely with G20 partners to ensure we understand the drivers of price increases and is committed to taking the steps necessary to mitigate the effects on the most vulnerable.

Sources of food price volatility

The Government recognises that a range of views exist on the causes of volatile food prices. At the same time, it is clear that a number of factors have affected commodity prices recently. For example, there have been supply shocks such as poor harvests in Russia and Ukraine in 2010, followed by the imposition of export restrictions, and lower-than-expected maize yields in the United States and Argentina (due to adverse weather conditions). Such developments have reduced stocks, particularly in the major exporters. High energy prices, which affect the cost of agricultural inputs such as fuel and fertilizer, and a weaker US Dollar are two other important factors.

International regulation of commodity markets

The Government strongly supports the G20 commitment to improve the regulation, functioning, and transparency of financial and commodity markets. The UK authorities are playing a full role towards meeting this objective – including through the work of the International Organisation of Securities Commissions (IOSCO) and also in the EU, where various measures are being considered in the Markets in Financial Instruments Directive review, and the Market Abuse Directive review.

Transparency in commodity trading

The Government supports greater transparency in commodities derivative markets. Commodities derivatives are financial instruments whose value depends on the expected future price of the associated commodity. Enabling data to be compared across different markets makes it easier for regulators to analyse, interpret and act where necessary.

The Government also supports the global initiative to create more transparency in Over-The-Counter derivatives. Over-The-Counter derivatives, which can include commodities derivatives, are trades that take place directly between two parties without using trading infrastructure (such as an exchange). The Government supports moves to ensure that, where appropriate, standardised Over-The-Counter derivatives are traded on exchanges and electronic platforms. This is an important part of the G20’s commitment to improve transparency, reduce systemic risk and combat market abuse. As European measures are developed in this area, the Government will be working closely with the European Commission and other member states to ensure that the G20’s objectives are met while ensuring that market efficiency and liquidity are preserved for the benefit of market users.

The Government supports strong regulatory oversight powers in commodity derivatives markets, including through the application of an active and formalised position management regime. A position management regime means that the regulator actively monitors what is happening in the market. If it is concerned about any activity, the regulator can intervene with those carrying out the activity, requiring them to explain their actions or, if necessary, to wind down their position in the market.

On the question of position limits – which is effectively a limit on the share of a particular market an investor is allowed to hold at one time – the Government believes that the authority to set position limits would appropriately be a part of the position management toolkit. However, the Government does not think position limits should be the leading element in the toolkit as they are inflexible tools, which are unlikely to be effective in addressing price volatility. Indeed, position limits may ultimately reduce liquidity, which could pose serious risks to those markets and could increase price volatility.

International food prices

Sources of food price volatility

International regulation of commodity markets

Transparency in commodity trading

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Europe & International: the agenda for financial services index