Soaring prices of key commodities such as food and energy have triggered a cost of living crisis around the world, including in Europe. The United Nations said the increases may have also pushed an estimated 71 million people in developing nations into poverty.

Lighthouse Reports, a European non-profit newsroom, analysed the accounts of more than 70 major pension funds in Spain, Italy, Germany, the Netherlands, Germany, the UK, Finland and Denmark.

While some funds explicitly forbid speculating in commodities, especially in food, 15 are currently investing in them, with the three biggest buyers the Netherlands, UK and Denmark holding a total of €32.5bn between them.

According to Jayati Ghosh, professor of economics at the University of Massachusetts Amherst, the findings show that pension funds are amongst the financial institutions that have aggravated the problem of investor speculation driving food prices.

This is “particularly egregious” because these funds are funded by workers and yet they are “engaging in actions which destroy the living standards of those workers”, she said.

Most funds do not disaggregate between hard commodities, such as gold and oil, and soft commodities, such as agriculture and livestock, but experts say the ultimate impact — rising commodity prices — is likely to be the same.

“Whether it is in food or energy, both are equivalently terrible from the point of view of workers and developing countries because a fuel price increase translates into prices of all other prices going up,” says Ghosh.

In addition, commodity markets are risky to invest in, said Ann Pettifor, one of the few economists who predicted the 2007-2008 global financial crisis.

“I don’t want my pension fund to go near something as volatile as a commodity market, basically, especially the ones in energy and in food,” she said.

To invest or not to invest?

The funds, however, have defended their actions as having no connection to spiralling food prices.

“Trading in commodity futures has no upward effect on prices, not even in the market for agricultural commodities. This view is supported by academic research,” said ABP, the Dutch pension giant and the most significant investor by far of commodity derivatives among pension funds analysed.

Its investments in 2021 totalled €32.5bn, of which it says around 30 percent are in food commodities. The increase in commodities prices last year meant ABP’s investments grew by €8bn — despite net sales.

BpfBOUW, the fourth largest pension fund in the Netherlands, which has invested €150m in agricultural commodities, echoed this view, saying it is “virtually impossible” for the futures market to drive up prices on the physical market.

Yet others have taken an unequivocal position against such speculation.

Pensioenfonds Vervoer, a fund for the Dutch transport sector, said one reason it does not invest in commodities is because it can push up prices.

KBC, Belgium’s largest pension fund, also said entities in its group “will not be involved in “food speculation” or will not organise speculative trading on soft commodities” and only does so for clients directly involved in the food and agriculture sector.

Dave Whitcomb, founder of Peak Trading and a former commodity trader for Cargill, one of the world’s largest grain traders, also disputes the positions taken by ABP and BpfBOUW.

“I would argue that that would be a very exceptional market where buying doesn’t drive prices,” he said.

Yaneer Bar-Yam, a professor and founding president of New England Complex Systems Institute whose seminal 2011 paper showed speculation was a primary cause of food price increases, also dismissed this defence.

“The science is very clear that trading does have upward effects on prices”, and that claims to the contrary, “are counter to the manifest role of buying and selling in commodity price-setting markets and validated predictions using quantitative models”.

He said that pension funds’ investments in food commodities “are undermining their mission as advocates for the public good.”

A ‘wall of money’

Lighthouse’s analysis found the University Superannuation Scheme, a public fund for university employees in Britain, holds £1.5 billion (€1.7 billion) in commodity derivatives.

The UK government-backed National Employment and Savings Trust (NEST), increased the amount it invested in commodities from £275m [€314m] in December 2019 to £657m in December 2021, of which about 25 percent are in agricultural derivatives.

Sampension, Denmark’s third largest pension manager, and Lægernes, the fund for Danish doctors, have invested €280m and €300m, respectively, in commodity futures.

In many occasions annual reports included only general information about derivatives and rarely touch on commodity derivatives. In Finland, a country known for its progressive policies, all of the seven major funds gave vague answers, declined to elaborate or how much they have invested.

The futures market — allowing commodities to be bought and sold in the future at a price agreed in the present — is supposed to function to allow commercial players to hedge their risks. But Pettifor said the financialisation of commodities has made price spikes inevitable.

“Take an asset which is finite — whether it be grain, property or energy: when a wall of money is aimed at that finite asset, the wall of money inflates the price,” she said.

War…or speculation?

News headlines have pinned the blame for runaway inflation on Russia’s invasion of Ukraine, but the United Nations Conference on Trade and Development (UNCTAD) said while the war “contributed to this situation”, “insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds”.

It has called for governments “to include tighter commodity market regulation as part of their policy mix to curb price spikes that are hitting consumers in the developing world hard.”

Yet Europe seems determined to further deregulate the financial markets, according to Sirpa Pietikäinen, a Finnish MEP for the centre-right European People’s Party, who sits on the economic and monetary affairs committee.

The Market in Financial Instruments Directive (MiFID) was set up in the wake of the 2007-2008 crisis to curb excessive speculation on commodities but over the years, financial institutions successfully lobbied to weaken it.

Last year’s amendments to the updated framework, MiFID II, further loosened the rules.

A review of MiFID II is currently underway. A draft text was presented on Monday (11 October) during the economy committee meeting and deadlines for amendment are Wednesday (13 October) — but MEPs say the political discussions are likely to be held later this year or or early 2023.

“You’ve probably heard this deregulation-speak coming from industry representatives. Now the news is that we are in a war economy, and our companies can’t tolerate all the administrative burden. So now you need to deregulate,” Pietikäinen said.

She herself is a fan of regulation “because (it) is the basis of a civil way of living”. “With ‘no rules’ it’s always the ‘rules of the strongest’, and that I do not want,” she added.

Pietikäinen also said the European Parliament’s current focus on doing away with environmental restrictions on fertiliser and pesticide use to prevent food shortages is misguided.

“There is not going to be a food shortage in Europe. The question is food prices”, and combating this would be better served by regulating the speculative markets, according to Pietikäinen.