'Parasitic' sugar speculators blamed for volatility

Image caption,
The price of sugar recently rose to its highest level in 30 years

Leading sugar traders have blamed recent volatility in the price of sugar on "parasitic" speculators in a letter seen by the Financial Times.

Sugar recently rose to its highest price in 30 years.

The World Sugar Committee, which represents big traders, told the ICE Futures US exchange that high-frequency traders "enrich themselves at the expense of traditional market users".

But ICE is said to believe such traders are not the cause of price volatility.

Algorithmic, or high-frequency, traders use computers and advanced mathematics to buy and sell positions in the market, sometimes within seconds, taking advantage of small differences in price to make profits.

The New York-based exchange has said that algorithmic traders help to provide the market with liquidity.

But in a letter seen by the Financial Times, Sean Diffley, chairman of the WSC, said: "Arguably, computer-based traders do not even contribute to the traditional function of the speculator in allowing producers and consumers to transfer price risk, since they do not take price risk home."

Last week, the price of raw sugar for March delivery reached 36.08 cents (22.46 pence) per pound, the highest price since November 1980.

The WSC has asked ICE Futures to put in place rules to help limit price volatility.

The exchange has said it would consider introducing "circuit breaker" technology to offset extreme swings in the price of sugar.

Cyclone Yasi, which recently hit Australia's Queensland coast, undoubtedly had an effect on commodity prices, with some analysts suggesting that up to half of that state's sugar cane crop could be lost.

Australia is one of the top three sugar cane exporters in the world.

Greater regulation

Commodities are traded on futures markets where a contract is agreed between a producer to sell a commodity to a buyer for a set price, at a certain time.

This allows both parties to plan further into the future and offset the short-term risk of, say, a poor harvest or adverse weather conditions.

But some believe that this form of commodities trading is merely pushing prices higher and penalising the poorest.

Campaign group the World Development Movement (WDM), argues the problem is one of institutions and traders "betting on food".

It believes speculators drive commodity prices higher, making food too expensive for the poorest to buy.

WDM wants to see tighter regulation of futures contracts with limits on the amount that can be paid for commodities.

Warning system

However David Hightower, of forecasting service the Hightower Report, told the Today programme last week that speculators performed an important role in warning the market of limited stocks.

"It's like a doctor with a patient - you want to see how high the temperature is. That whole argument about speculation fuelling prices - I think it's good that we are seeing that and maybe it'll save us from having a real shortage."

The UN's Food and Agriculture Organization (FAO) recently said it did not believe large increases in the price of commodities were caused by speculators on the financial markets, though it did suggest that such speculators could make such price increases worse.

It said price increases "might have been amplified by speculators in organized futures markets. However, limiting or banning speculative trading might do more harm than good".

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