Following are comments on financial investment in the sugar market from Lindsay Jolly, a senior economist with the International Sugar Organization. Jolly spoke yesterday at a conference in London, where the ISO is based.
“There is an important wild card that could frustrate investor perception and appetites to invest in sugar and ethanol going forward.
“Financialization of commodity markets is chiefly arising through the increased role of non-traditional speculators in agricultural markets generally. Financialization means that financial institutions have brought new drivers to commodity prices. They include all kinds of short-term and long-term institutional investors such as pension funds, hedge funds, sovereign wealth funds and large banks which manage index-related investment instruments that they buy on the futures markets.
“Typically these speculators have only financial motives and no interest or knowledge in the underlying commodities. In effect, non-traditional speculators have increased the interdependence between commodity and financial markets, and they disrupt traditional functions of agricultural-commodity markets, particularly futures markets, to discover prices and in the way that you can manage your risk.
“We are seeing a key focus on this whole issue of financialization, and there’s a very lively discussion about how can this be minimized in the future, and there’s even talk of reregulation of futures exchanges and over-the-counter instruments. Going forward, only time will tell if financialization becomes a wild-card driver for the world sugar and ethanol industry.
“It is certainly an issue that has been impacting the market, particularly in the last 18 months, and if that’s the sort of volatility we have to live with going forward, it will change the way we do business.”