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Advantages & Disadvantages of Food Speculation
Food speculation is a rather controversial topic. Over the past decades, it has become quite popular to trade financial instruments related to commodities on stock exchanges in large volumes.
While there are some advantages to food speculation, there are also many problems related to this concept. In this article, the pros and cons of food speculation are discussed.
Advantages of Food Speculation
- Food speculation may lead to higher returns for investors
- Can help companies to hedge against future price increases
- Assurance of supply with commodities
- Farmers are better able to plan future returns
- Overall higher security in the food supply chain
- Can help to determine the optimal level of investment in future technologies
- Big farming corporations may be able to raise money on the stock market
- May lead to higher efficiency of markets
- May help countries to assure their local food supply
- Food speculation may raise awareness on certain problems
Food speculation may lead to higher returns for investors
Food speculation is often used by international investors in order to improve their overall return on investment. In fact, food speculation can be quite profitable if people know what they are doing. Especially in times with low interest rates, investors will often no longer be able to make money in a conventional manner and have to look out for alternative investments instead.
Since our world population is growing at a rapid speed, chances are that food will become a quite scarce resource in the future and chances are that food prices will increase as well due to increasing global demand for food. Thus, food speculation can be a tool for investors to make significant profits in the long run.
Can help companies to hedge against future price increases
Another advantage of food speculation is that companies will be able to hedge against future price increases in foods. This is especially important for companies that need to buy large amounts of food on a regular basis. For example, a ketchup producer will need large amounts of tomatoes in the production process.
If the prices for tomatoes vary quite a lot, it will be hard for this company to forecast profits in the future. Moreover, the company may also have difficulties with determining the optimal wholesale price for its products if it doesn’t know how tomato prices will develop in the future.
Hence, in order to hedge against those future price increases in commodities, the company may engage in food speculation. By buying futures contracts that enable the company to buy tomatoes at a certain price for many months or even years, the company does no longer have to worry about the price development of tomatoes for this period of time.
Assurance of supply with commodities
Food speculation can also help companies to assure their supply with certain commodities. Some foods are rather limited and rare and if companies urgently need those specific foods, they may have to make contracts regarding the delivery of those foods early in advance.
This will often only be possible through buying futures contracts related to those foods on the global stock markets, especially if the required quantities are quite big and single producers will not be able to deliver those amounts of food.
Farmers are better able to plan future returns
Food speculation may not only be beneficial for companies who process those foods, it may also be helpful for farmers since they will be able to make contracts for many months or even years. For instance, farmers could make long-term contracts with food production companies to ensure a certain price for their foods.
In turn, those farmers will be much better able to forecast their returns for the future, which could reduce the overall level of uncertainty in the whole food production industry.
Therefore, if food production companies make long-term contracts with farmers in order to hedge against future price changes on the global food market, this can actually provide farmers with additional security.
Overall higher security in the food supply chain
Another upside of food speculation is that it could also increase the overall level of security in the whole food supply chain. If farmers and food production companies are able to make long-term commitments by buying futures contracts and signing additional long-term contracts, chances are that the whole food supply chain will become much more secure and sustainable since all parties are hedged in the long run and could better plan for the future.
Can help to determine the optimal level of investment in future technologies
Food speculation may also help to determine the optimal long-term investment level in the food sector. Through food speculation and the related futures contracts on food, food production companies and farmers will be better able to evaluate how much money they will make from their businesses in the future and can therefore also much better figure out how much they want to invest in their business today.
In fact, investments are encouraged if people are able to forecast the future and food speculation indirectly gives many parties the opportunity to do so.
Big farming corporations may be able to raise money on the stock market
Food speculation not only include direct speculation on food prices, it also includes investments in the food industry. For instance, if a big farming company or a food producer experiences financial difficulties and urgently needs money to maintain its operations and not to go out of business, food speculators may provide the money that is necessary to continue operations.
In fact, if big farming companies or food producers are listed on global stock markets, they can raise plenty of additional capital through the emission of new shares. Thus, food speculation may also help companies in times of financial distress so that these companies will be able to stay in business.
May lead to higher efficiency of markets
Another benefit of food speculation is that it can also make our financial food markets more efficient. Through futures contracts and other options on foods, food prices can be forecasted in the far future and any inefficiencies that could result from illiquidity on the financial food market can be eliminated.
Therefore, food speculation may not only be beneficial for big farming and food production corporations, it can also help investors to better figure out what the future food market will look like and investors can adjust their strategies according to that.
May help countries to assure their local food supply
Food speculation can not only help corporations and farmers, it may also help on a country level. For instance, if countries know that they need significant amounts of certain foods in the future, they could buy futures contracts on global stock markets in order to assure a certain price for those foods.
In turn, countries will be better able to plan their expenses for those foods and they will also be better able to manage their overall expenses and their finances due to that opportunity.
Food speculation may raise awareness on certain problems
Food speculation may also be helpful in the sense that governments can recognize distortions in the global food market and can introduce stricter rules and regulations on the food market in order to remove those distortions.
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Disadvantages of Food Speculation
- People in poor countries will often not be able to afford buying enough food
- Can lead to significant poverty
- Food speculation can lead to malnutrition
- Starvation related to food speculation
- High level of insecurity for local people
- Education levels may suffer as well
- Food speculation is questionable from an ethical perspective
- People who speculate with food may feel guilty
- Food speculation may increase land prices
- Increasing level of homelessness
- Food speculation may threaten global welfare programs
People in poor countries will often not be able to afford buying enough food
Although there are some advantages to food speculation, there are also many problems related to this concept. One major disadvantage of food speculation is that people in poor countries will often no longer be able to buy enough food in case food prices significantly increase due to food speculation.
In fact, many people in poor countries of our planet are barely able to survive and have to spend almost all of their income on food and other basic things for daily life.
Hence, if food prices increase due to food speculation, those people will often have no opportunity to buy enough food and may suffer from serious hunger.
In turn, the quality of life of those people will also greatly suffer and they will also have far less power to achieve things in their lives.
Can lead to significant poverty
Another problem with food speculation is that it can also lead to extreme poverty for millions of people around the world. Enough food is crucial to stay vital and to get things done. Moreover, without enough food, people will also not be able to work enough to make sufficient money to provide for their families. In turn, not only adults, but also children will suffer from serious hunger.
Consequently, food speculation can lead to a lot of pain for millions or even billions of people around the world and many people will suffer from significant poverty once food prices increase too much.
Food speculation can lead to malnutrition
If food prices increase, people will not only get insufficient amounts of food, they will likely also no longer be able to buy a variety of different foods to supply themselves with all nutrients and vitamins that are crucial for our body and our brain to stay healthy. In turn, food speculation can lead to serious malnutrition and many people will suffer from diseases related to a lack of certain nutrients.
Moreover, also their immune system tends to be much weaker due to a lack of crucial vitamins. Hence, in order to protect millions of people around the world from malnutrition, prohibiting food speculation may also be a suitable tool to achieve this goal.
Starvation related to food speculation
Many people not only suffer from serious hunger due to food speculation, some of them will even die sooner or later. In fact, starvation is a serious problem that causes many people to die each year. We have the technology and also the knowledge to feed everyone on our planet.
Yet, through food speculation and other wealth distribution issues, we still let many people die from hunger each year. Hence, in order to protect those people, refraining from food speculation and taking additional measures is crucial also in this regard.
High level of insecurity for local people
In general, food speculation implies a high level of insecurity for the local population. Even people who earn good money from their jobs right now may get into financial trouble if food prices become too high due to food speculation.
Therefore, the overall level of insecurity among the general public may be quite high in many countries all over the world since people simply don’t know whether they will be able to afford enough food in the future or not.
In turn, this can also lead to serious mental issues since people will have to worry quite a lot.
Education levels may suffer as well
Another downside of food speculation is that it can also have a serious negative effect on education levels of many people across the world. Especially in poor developing countries, parents will often no longer be able to provide their children with sufficient food if food prices increase too much due to food speculation.
In turn, those kids will also no longer be able to focus in a sufficient manner since they simply lack the vitamins and nutrients that would be necessary for their brain to work properly. In turn, education levels of those children will be quite low.
This also implies that many of those children will also be trapped in poverty once they turn into grownups since education is key to overcome poverty and without proper education, many people will not get proper jobs and will be stuck in their miserable situation.
Food speculation is questionable from an ethical perspective
In general, the whole concept of food speculation can be considered to be rather questionable from an ethical perspective. We all know that food speculation can lead to significant global hunger, starvation and to various other serious issues. Hence, with all this in mind, we should seriously consider abandoning food speculation on a global scale in order to protect the poorest in our global society.
Therefore, you can make your individual contribution by refusing to engage in food speculation and you can also multiply your positive effect by convincing your family and friends about the problems that come along with food speculation.
People who speculate with food may feel guilty
Food speculation can not only have a negative impact on millions of people in poor parts of our planet, it can also lead to a guilty conscience for people who speculate with food. In fact, many food speculators feel guilty deep inside, yet it is their profession that earns them really good money.
However, those people tend to be rather unhappy in the long run and if you currently consider a career in the food speculation business, keep in mind that this may result in a significant emotional burden for you in the long run.
Food speculation may increase land prices
Another issue with food speculation is that it can also significantly increase land prices in poor regions of our planet. While this can be beneficial for people who own large areas of land since they can sell this land to investors and earn good money from it, it can also lead to detrimental effects for farmers who don’t own land but have to rent their land instead.
In such a case, farmers will often no longer be able to pay the lease for their land and may lose their livelihood due to that.
Increasing level of homelessness
Increasing property prices may not only lead to serious issues for many small local farmers, it can also cause significant issues for local housing markets. If property prices increase significantly due to food speculation, chances are that many locals will no longer be able to pay their rent for their flats. In turn, many people may end up homeless in the streets.
Food speculation may threaten global welfare programs
If food prices increase too much due to food speculation, global welfare programs may also no longer be able to provide enough food and water to poor people who rely on those programs in order to survive. Those welfare programs often rely on donations in order to maintain their operations.
If food prices increase due to food speculation, those welfare programs will only be able to buy less food with the same amount of money and will no longer be able to provide enough people with sufficient food.
Top 10 Food Speculation Pros & Cons – Summary List
|Food Speculation Pros||Food Speculation Cons|
|Food speculation can help to hedge||Food speculation can contribute to poverty|
|Can give companies better planning chances||Can lead to global hunger|
|Can lead to higher returns for investors||Food speculation leads to starvation|
|Food speculation can assure long-term supply||Locals in poor countries suffer from it|
|May improve efficiency of markets||Big swings in food prices|
|May raise awareness on certain problems||Can lead to malnutrition|
|Food speculation may help whole countries||Food speculation raises ethical concerns|
|Farming companies can raise money||You may feel guilty if you speculate with food|
|May help to plan future investments||Homelessness may increase|
|Higher level of security in the food chain||Increase in land prices|
Should We Prohibit Food Speculation?
As we have seen before, there are many important advantages and disadvantages of food speculation. In my opinion, the problems with food speculation outweigh the advantages and therefore, I would highly recommend that we prohibit or at least introduce stricter regulations regarding food speculation in order to improve the overall living conditions of millions or even billions of people across the world.
About the author
My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.
As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.
After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.
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