Commodity market speculation should be more stringently regulated to halt abrupt changes in food and energy prices, a report by the UN Conference on Trade and Development (UNCTAD) has suggested.

UNCTAD says that “excessive speculation” carried out by institutions like investment banks and hedge funds has helped increase volatility in food and energy prices.

Although “a balance between speculators and commercial hedgers is necessary for price discovery and sustained liquidity”, the report says that the involvement of large financial institutions in commodity price bets “has come to outstrip the role of commercial hedgers” by an estimated 70% to 80%, resulting in unstable prices.

Energy commodities, food and metals saw the largest fluctuations in price between 2020 and 2022, with the cost of energy commodities increasing by 91.2% and food by 23.9%, based on the average for the period January to May 2022 and January to May 2021.

The report adds to UNCTAD’s previous findings that the “growing participation of financial investors in commodity trading for purely financial motives was a contributing factor to price rises” and stresses the impact of these price movements on developing economies.

It advocates the systemic introduction of tighter regulation to reduce the impacts on commodity markets and calls on the US Commodities Futures Trading Commission to use its existing powers to tighten position limits in energy futures markets and increase margin requirements for traders.

Reforms proposed in the report include better access to information about commodity derivatives markets and more accurate data around the physical availability of commodities, including spare capacity and global stock holdings for oil, and expected harvests and stocks for agricultural commodities.

“Market surveillance authorities could be mandated to intervene directly in exchange trading on an occasional basis by buying or selling derivatives contracts with a view to averting price collapses or deflating price bubbles,” UNCTAD says.

Also suggested is “an outright ban on commodity index funds and compulsory premarket government licensing of complex financial instruments”, which could “shift the burden of proof” regarding a financial instrument’s utility and risks “onto those seeking to profit by its trade”.

“There’s still time to step back from the edge of recession,” says UNCTAD secretary general Rebeca Grynspan. “We have the tools to calm inflation and support all vulnerable groups.”

“But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession,” Grynspan adds.

UNCTAD said last month that an initiative to restore Ukrainian exports of grains, cereals and oils was helping to reduce prices, after Russia’s blockade of Ukraine’s ports led to millions of tonnes of goods being left in warehouses.

The Trade and Development Report 2022 also calls on advanced economies to avoid relying on increasingly higher interest rates and austerity measures to curb price increases. Warning that a global debt crisis could be imminent, it suggests financial institutions should “provide increased liquidity and extend real debt relief for developing countries” and “prioritize a multilateral legal framework for handling debt restructuring”.