G20 too divided to back tough curbs on speculators

LONDON Mon Feb 14, 2011 11:01am EST

Related Interactive

LONDON (Reuters) - French hopes for tough curbs on commodities speculation to tame soaring food prices look set to be thwarted as leading producer nations line up to oppose market interference.

France is president of the Group of 20 leading developed and developing economies this year. The group's finance ministers meet in Paris on Friday and Saturday with commodities high on the agenda.

But as with an earlier French-backed push for a global tax on financial transactions, there is no consensus for radical measures beyond more reporting requirements for traders.

Faced with opposition from key quarters, France sought on Monday to downplay expectations, Economy Minister Christine Lagarde saying France had no desire to regulate raw material prices.

"What we would like to do, on the other hand, is try to reduce volatility by simply shining a light on market fundamentals," she told a news conference.

That marked a softening of tone from French President Nicholas Sarkozy who said last month that "if it is not regulated it is a free for all, it is the jungle law."

Soaring prices are certainly causing pain. The World Bank said last week it expected volatile, higher than average grain prices until at least 2015 with nearly a billion people worldwide hungry already.

G20 sources said there is a split between major producers of commodities who oppose draconian market curbs, and the big consumers of commodities who want greater control of prices.

The United States, Brazil and Canada, all major producers of foods, metals and other commodities, have made a point in recent days of publicly opposing the French push.

Such countries fear that interfering with commodities prices will send misleading signals that could hamper investment to end extraction and cause production bottlenecks.

It was U.S. and Canadian opposition to a global transaction or "Tobin Tax" that sank the idea as a G20 policy.

"We have more fundamental issues to address than perhaps some degree of speculation in markets," Canada's Finance Minister Jim Flaherty said recently.

"I hope we don't get sidetracked on issues that are not central to the world economic recovery," he said.

Lael Brainard, a U.S. Treasury undersecretary who accompanied Treasury Secretary Timothy Geithner on a one-day trip to Brazil this month, said Brazil and the United States shared common ground on the G20 commodities agenda and wanted to keep the focus on improving market functioning.

FUNDAMENTALS VS SPECULATION

Sarkozy has floated numerous proposals including limiting positions investors can take, tagging which trades are "speculative" or "commercial" and regulating off-exchange trading.

A twin-track approach is emerging with G20 finance ministers discussing curbs such as position limits on futures markets while farm ministers are looking at better exchange of information on agricultural products, as is happening in oil.

G20 officials say it will be hard to agree tough measures like position limits without consensus on whether speculation rather than supply and demand factors sent food prices to record highs and triggered street protests, including the downfall of the ruling regime in Tunisia.

"Without a clear diagnosis it is difficult to talk about remedies," Bank of Canada Deputy Governor John Murray said last week.

Officials at the Paris-based OECD club of rich nations, said an in-depth analysis of agricultural commodities markets showed both fundamental and speculative factors driving markets.

"Fundamentals are surely strong drivers of commodities prices. Speculation is there also, but we cannot say how big is the role of speculation," OECD Chief Economist Pier Carlo Padoan said.

"The lack of knowledge on this issue causes debate among G20 on what should be done to regulate markets," he said.

Other G20 sources said this week's meeting was likely to agree on face-saving measures such as a mandate for a working group to analyze why commodities markets are so volatile.

"Analyzing commodities trading doesn't necessarily have significant policy implications," a finance ministry official from a major G20 country said.

The G20's regulatory task force, the Financial Stability Board, and other regulators like the International Organization for Securities Commissions (IOSCO) are already looking at the relationship between physical and futures markets in commodities.

Regulators are already focusing on better trade transparency in off-exchange markets but feel there is some way to go regarding physical markets and in how to aggregate data from all types of markets to spot underlying trends in trading.

The United States is already introducing position limits in some of its own commodities markets and the European Union is looking to give supervisors powers to intervene with trading curbs when needed.

(Additional reporting by Sybille de La Hamaide and Marc Angrand in Paris, Rie Ishiguro in Tokyo, Francesca Landini in Milan, Louise Egan in Ottawa and Jan Strupczewski in Brussels, editing by Mike Peacock)