Posted: Thu Jun 23 2011, 01:48 hrs
By Javier Blas in London
The World Bank is taking the rare step of encouraging developing countries to buy insurance in the derivatives markets against sudden changes in food prices with a deal that should allow the nations to hedge some $4bn worth of commodities.
The deal, struck with investment bank JPMorgan, comes as countries such as China and India weather a second surge in agricultural commodities prices following the 2007-08 food crisis.
But the initiative, timed to coincide with the first ever G20 meeting of agricultural ministers, could prove controversial as lawmakers in countries from the US to France try to clamp down on what they describe as excessive speculation in commodities derivatives.
Robert Zoellick, World Bank president, said on Tuesday that the “agriculture price risk management” tool showed what “sensible financial engineering” could do. “We have been in a period of extraordinary volatility in food prices, which poses a real danger of irreparable harm to the most vulnerable nations,” Mr Zoellick said, adding that food prices were “the single gravest threat” facing developing countries.
The facility will target the private sectors of developing nations, including farming cooperatives and food processing companies. JPM would offer simple hedging instruments.
The World Bank will underwrite $200m in credit risk under the initiative while JPM, one of the largest dealers in commodities in Wall Street, will take on a similar amount. The World Bank said this should enable countries to gain up to $4bn in price protection. The institution said that other banks were likely to join later.
The World Bank is taking the rare step of encouraging developing countries to buy insurance in the derivatives markets against sudden changes in food prices with a deal that should allow the nations to hedge some $4bn worth of commodities.
The deal, struck with investment bank JPMorgan, comes as countries such as China and India weather a second surge in agricultural commodities prices following the 2007-08 food crisis.
But the initiative, timed to coincide with the first ever G20 meeting of agricultural ministers, could prove controversial as lawmakers in countries from the US to France try to clamp down on what they describe as excessive speculation in commodities derivatives.
Robert Zoellick, World Bank president, said on Tuesday that the “agriculture price risk management” tool showed what “sensible financial engineering” could do. “We have been in a period of extraordinary volatility in food prices, which poses a real danger of irreparable harm to the most vulnerable nations,” Mr Zoellick said, adding that food prices were “the single gravest threat” facing developing countries.
The facility will target the private sectors of developing nations, including farming cooperatives and food processing companies. JPM would offer simple hedging instruments.
The World Bank will underwrite $200m in credit risk under the initiative while JPM, one of the largest dealers in commodities in Wall Street, will take on a similar amount. The World Bank said this should enable countries to gain up to $4bn in price protection. The institution said that other banks were likely to join later.
G20 agriculture ministers are set to agree at their Paris meeting that hedging “would provide an important contribution” to agriculture, according to a draft of the group’s communiqué obtained by the Financial Times, but the G20 remains split in other areas such as biofuels.
The use of financial insurance—or hedging—in agricultural commodities prices is common in the developed world, particularly in the US, Canada, Australia and France, and was behind the birth more than a century ago of the Chicago Board of Trade and others commodities exchanges.
But many developing countries have little experience using derivatives, both at the sovereign and companies level.
Mexico, however, took earlier this year the unusual step of disclosing it had bought futures contracts in Chicago to insure itself against the effect of rising corn prices on tortilla, a food staple in the country.
The use of financial insurance—or hedging—in agricultural commodities prices is common in the developed world, particularly in the US, Canada, Australia and France, and was behind the birth more than a century ago of the Chicago Board of Trade and others commodities exchanges.
But many developing countries have little experience using derivatives, both at the sovereign and companies level.
Mexico, however, took earlier this year the unusual step of disclosing it had bought futures contracts in Chicago to insure itself against the effect of rising corn prices on tortilla, a food staple in the country.
