An investigation by journalists has revealed that some of Europe's largest pension funds are investing billions of euros in volatile commodities markets, risking the hard-earned income of millions of workers while simultaneously contributing to a global food crisis partly triggered by these types of investments.
The findings also raise questions about whether the European Union's efforts to deregulate financial markets will further worsen the situation in the future. The bloc's rules governing capital markets are currently under review.
Pension funds are among those financial institutions that have exacerbated the problem of investor speculation contributing to rising food prices.
Soaring prices for essential commodities, such as food and energy, have caused a cost-of-living crisis across the world, including in Europe. The United Nations has stated that this increase has potentially pushed around 71 million people in developing countries into poverty.
The European non-profit newsroom Lighthouse Reports analysed the reports of over 70 of the largest pension funds in Spain, Italy, Germany, the Netherlands, the United Kingdom, Finland, and Denmark.
Although some funds explicitly prohibit speculation in raw materials, particularly food, 15 funds currently invest in them, and the three largest buyers – the Netherlands, the UK, and Denmark – held a total of 37.6 billion euros at the end of 2021.
According to Jayati Ghosh (Jayati Ghosh), Professor of Economics at the University of Massachusetts Amherst, the data shows that pension funds are among the financial institutions that have exacerbated the problem where investor speculation drives up food prices. It is “especially dangerous” because these funds are financed by workers, and yet they “are doing things that undermine the living standards of those workers”, she noted. Most funds do not distinguish between “hard” commodities, such as gold and oil, and “soft” commodities, such as agricultural and livestock products, but experts argue that the overall impact – the increase in commodity prices – will likely be the same. “Whether it is food or energy, both are equally devastating from the perspective of workers and developing countries, because fuel price increases mean all other prices go up,” says J. Ghosh.
Moreover, investing in raw materials markets is risky, believes Ann Pettifor (Ann Pettifor), one of the few economists who predicted the 2007–2008 global financial crisis. “I would not want my pension fund to be involved in volatile things like the commodities market, especially the energy and food markets,” she said.
To invest or not to invest?
However, the funds defend their actions, claiming they are not linked to rising food prices.
“Trading in commodity futures does not have an upward impact on prices, not even in the agricultural commodities market. This view is confirmed by academic research,” informs ABP, a Dutch pension giant and by far the most significant investor in commodity derivatives among the pension funds analysed in the study. Its investments in 2021 reached 33.9 billion euros, of which approximately 30% is in food commodities. The increase in commodity prices last year meant that ABP's investments grew by 8 billion euros – despite net sales.
The Netherlands' fourth-largest pension fund, BpfBOUW, which has invested 150 million euros in agricultural raw materials, concurred, stating that it is “practically impossible” for the futures market to drive up prices in the real market.
However, others have taken a clear stand against such speculation.
The Dutch transport sector fund Pensioenfonds Vervoer noted that one of the reasons it does not invest in raw materials is the fact that it can increase prices.
Belgium's largest pension fund, KBC, also stated that its group companies “will not engage in 'food speculation' and will not organise speculative trading in food commodities” and only do so for clients directly involved in the food and agricultural sectors.
Dave Whitcomb (Dave Whitcomb), founder of Peak Trading and former commodity trader at Cargill, one of the world's largest grain traders, also disputes the position of ABP and BpfBOUW. “I think it would be a very special market where buying does not drive the price,” he argued.
Professor Yaneer Bar-Yam (Yaneer Bar-Yam), founder and president of the New England Complex Systems Institute (New England Complex Systems Institute), who in 2011 published a fundamental paper proving that speculation is a primary cause of rising food prices, also rejected the argument. “The science is very clear that trading does indeed impact price increases” and that claims to the contrary “contradict the obvious role of buying and selling in commodity pricing markets and the forecasts confirmed by quantitative models”. He stressed that pension fund investments in food commodities “undermine their mission as advocates of the public good”.
“Money mass”
An analysis by Lighthouse found that the University Superannuation Scheme, which is the national fund for UK university employees, currently holds 1.5 billion pounds (1.7 billion euros) in commodity derivatives.
The UK government-backed National Employment and Savings Trust (NEST) increased the amount invested in raw materials from 275 million pounds [314 million euros] in December 2019 to 657 million pounds in December 2021, of which approximately 25% is in agricultural sector financial derivatives.
Sampension, Denmark's third-largest pension manager, also invested 280 million euros in commodity futures in 2021. In many cases, annual reports included only general information about derivatives, and they rarely touched on commodity-related securities. In Finland, a country known for its progressive policies, all seven of the largest funds provided vague answers, refused to provide more detailed information, or indicate how much they had invested.
The futures market, which allows buying and selling of commodities in the future at a price agreed upon in the present, should function to allow market participants to hedge against risks. But economist Ann Pettifor said that turning commodities into a financial market has made price spikes inevitable. “Take an asset that is finite – whether it be grain, property, or energy: when a massive flow of money is directed at that finite asset, it increases the price,” she noted.
War... or speculation?
News headlines blame the Russian invasion of Ukraine for the rapid inflation, but the United Nations Conference on Trade and Development (UNCTAD) noted that while the war “contributed to this situation”, “insufficient attention has been paid to the role of speculators and the madness of betting in the field of futures, commodity swaps, and exchange-traded funds”.
It called on governments to “include stricter commodity market regulation as part of their policy package to curb price hikes that are hitting consumers in developing countries hard”.
However, Europe seems determined to continue deregulating financial markets, according to Sirpa Pietikäinen (Sirpa Pietikäinen), a Finnish centre-right MEP from the European People's Party who serves on the Committee on Economic and Monetary Affairs. The Markets in Financial Instruments Directive (MiFID) was created after the 2007–2008 crisis to limit excessive speculation in commodities, but over the years, financial institutions have successfully lobbied to weaken it.
Last year's amendments to the updated regulation – the Markets in Financial Instruments Directive II – further eased the rules. The review of MiFID II is currently underway. The draft text was submitted on 10 October at an Economic Committee meeting, and the deadline for amendments was 12 October, but MEPs say that political discussions are likely to take place later this year or in early 2023.
“You may have heard this deregulation talk from industry representatives. Now the news is that we are in a war economy, and our businesses cannot bear all the administrative burden. Therefore, deregulation is now necessary,” said S. Pietikäinen. She herself is a proponent of regulation, “because (it) is the foundation of a civilised way of life”. “Without rules” there will always be “the rule of the strongest”, and that is not what I want,” she added. Sirpa Pietikäinen also argued that the European Parliament's current focus on lifting environmental restrictions on the use of fertilisers and pesticides to prevent food shortages is misguided. “There will be no food shortage in Europe. The question is about food prices”, and, according to S. Pietikäinen, this problem could be better addressed by regulating speculative markets.
Authors: Margo Gibbs, Tinsaei Lei Vins and Kabir Agarwal are journalists at Lighthouse Reports. This investigation was conducted in cooperation with EUobserver, Follow the Money (NL), Apache (Belgium), OpenDemocracy (UK), El Diario (ES), Il Bo Live (IT) and LongPlay (FI).